ThE GENESIS ENERGy ShARE OffER inVestment statement dated 13 maRcH 2014 ThE GENESIS ENERGy ShARE OffER
initial pUBlic oFFeRinG oF oRdinaRy sHaRes in Genesis eneRGy limited
inVestment statement dated 13 maRcH 2014
we’re in it for you IMPORTANT INfORMATION
(THE INFORMATION IN THIS SECTION IS REQUIRED Securities Act and Securities Regulations, as modifi ed Given these uncertainties, you are cautioned not to UNDER THE SECURITIES ACT 1978.) by the Securities Act (Genesis Energy Limited Crown place undue reliance on any forward looking statements share off er) Exemption Notice 2014. There is a registered contained in this Investment Statement. Under no Investment decisions are very important. They often have prospectus containing an off er of securities to which this circumstances should you regard the inclusion of forward long-term consequences. Read all documents carefully. Investment Statement relates. looking statements as a representation or warranty by Ask questions. Seek advice before committing yourself. This Investment Statement is an important document and the Crown, Genesis Energy, their respective offi cers, the In addition to the information in this document, important should be read carefully before deciding whether or not directors of Genesis Energy or any other person referred information can be found in the current registered to invest in Genesis Energy. to in this Investment Statement with respect to the achievement of the results set out in any such statement, prospectus for the investment. You are entitled to No one is authorised by the directors of Genesis Energy or that the underlying assumptions used will in fact a copy of that prospectus on request. or the Crown to give any information or make any be realised. representation in connection with this Off er which is not ThE fINANCIAl MARkETS AUThORITy contained in this Investment Statement, the Prospectus REGUlATES CONdUCT IN fINANCIAl MARkETS SUPPlEMENTARy dISClOSURE ANd or in other communications from the directors and WIThdRAWAl RIGhT The Financial Markets Authority regulates conduct in the Crown. Any information or representation not New Zealand’s fi nancial markets. The Financial Markets See Section 7 Terms of the Off er under the heading so contained may not be relied upon as having been Authority’s main objective is to promote and facilitate “Supplementary Disclosure and Withdrawal Right” for a authorised by the Company, the directors or the Crown. the development of fair, effi cient, and transparent description of the process should a signifi cant adverse fi nancial markets. If you are in any doubt as to any aspect of the Off er, you development occur prior to the Allotment Date. should consult your fi nancial or legal adviser or an NZX For more information about investing, go to Firm. Should you have any questions about this Off er, you http://www.fma.govt.nz can call 0800 90 30 90 (New Zealand only) during the fINANCIAl AdvISERS CAN hElP yOU MAkE Off er period. INvESTMENT dECISIONS You should seek your own taxation advice on the Using a fi nancial adviser cannot prevent you from losing implications of an investment in the Shares. money, but it should be able to help you make better investment decisions. NO GUARANTEE No person guarantees the Shares off ered under this Financial advisers are regulated by the Financial Markets Investment Statement. No person warrants or guarantees Authority to varying levels, depending on the type of the performance of the Shares or any return on any adviser and the nature of the services they provide. Some investments made pursuant to this Investment Statement. fi nancial advisers are only allowed to provide advice on a limited range of products. SEllING RESTRICTIONS When seeking or receiving fi nancial advice, you should The Off er is being made only to persons who would check– be New Zealand Applicants if they elected to apply — the type of adviser you are dealing with: for Shares, to Participating Iwi in New Zealand and to — the services the adviser can provide you with: Institutional Investors in New Zealand, Australia and — the products the adviser can advise you on. certain other jurisdictions. A fi nancial adviser who provides you with personalised No person may off er, sell (including resell) or deliver fi nancial adviser services may be required to give you a or invite any other person to so off er, sell (including disclosure statement covering these and other matters. resell) or deliver any Shares or distribute any documents You should ask your adviser about how he or she is paid (including this Investment Statement) in relation to and any confl icts of interest he or she may have. the Shares to any person outside New Zealand except Financial advisers must have a complaints process in in accordance with all of the legal requirements of the place and they, or the fi nancial services provider they relevant jurisdiction. work for, must belong to a dispute resolution scheme Unless otherwise agreed with the Crown and Genesis if they provide services to retail clients. So if there is Energy, any person or entity subscribing for Shares in the a dispute over an investment, you can ask someone Off er shall, by virtue of such subscription, be deemed to independent to resolve it. represent that he, she or it is not in a jurisdiction which Most fi nancial advisers, or the fi nancial services provider does not permit the making to him, her or it of an off er they work for, must also be registered on the fi nancial or invitation of the kind described in this Investment service providers register. You can search for information Statement, and is not acting for the account or benefi t about registered fi nancial service providers at of a person within such jurisdiction. None of the Crown, http://www.fspr.govt.nz Genesis Energy, the Joint Lead Managers, the Registrar or any of their respective directors, offi cers, employees, You can also complain to the Financial Markets consultants, agents, partners or advisers accepts any Authority if you have concerns about the behaviour liability or responsibility to determine whether a person of a fi nancial adviser. is able to participate in the Off er. IMPORTANT NOTICE fORWARd lOOkING STATEMENTS This document (“Investment Statement”) relates to the This Investment Statement contains certain statements Off er by the Crown of ordinary shares in Genesis Energy that relate to the future. Such forward looking statements Limited. Genesis Energy is the issuer of the Shares and are not a guarantee of future performance and involve the Crown is the issuer and promoter for the purposes of known and unknown risks, uncertainties, assumptions and the Securities Act and Securities Regulations. other factors, many of which are beyond the control of This document is an investment statement for the the Crown and Genesis Energy and which may cause the purposes of the Securities Act and the Securities actual results, performance or achievements of Genesis Regulations and is prepared as at, and dated, 13 March Energy to diff er materially from those expressed or 2014. It has been prepared in compliance with the implied by such statements. table of CONTENTS
section ONE 2 section TWO 4 section THREE 7 Letters from Offer at Investment the Crown and a Glance highlights chairman
section FOUR 12 section FIVE 27 section SIX 36 ABOUT Genesis Overview What are Energy of Financial my risks? Information
section SEVEN 40 section EIGHT 44 section NINE 46 Terms of About the How do the Offer Shares I apply?
Glossary 48 DEFINITIONS Terms used in this Investment Statement have the Appendix / specific meanings given to them in the Glossary Prospective (including certain industry-specific terms with which you may not be familiar). Financial Unless otherwise indicated, any references to Information 51 dates and times are to dates and times in New Zealand and any references to dollars ($) Directory are to New Zealand dollars.
IMPORTANT NOTICE This document is an investment statement. The purpose of an investment The Prospectus, which includes the most recent financial statements of Genesis Energy, statement is to: can be obtained, free of charge: —— provide certain key information that is likely to assist a prudent but non-expert —— by downloading it from www.genesisenergyshares.govt.nz; or person to decide whether or not to subscribe for securities; and —— by calling 0800 90 30 90 and requesting a copy be sent to you; or —— bring to the attention of such a person the fact that other important information —— from the Companies Office website atwww.business.govt.nz/companies . about the securities is available to that person in other documents. In certain limited circumstances, Applicants may have the right to withdraw their For more information to assist you in deciding whether or not to purchase the Applications. Further details of this withdrawal right are set out under the heading Shares offered to you, you are recommended to read the Prospectus which has been “Supplementary Disclosure and Withdrawal Right” in Section 7 Terms of the Offer. prepared in respect of this Offer.
Genesis Energy Share Offer investment statement 1 Section One Letters from the Crown and chairman
Letter from the CROWN
Dear Investor
Thank you for considering the Genesis Energy Share Offer.
Genesis Energy commenced operations in 1999 and since that time has grown to become New Zealand’s largest retailer of electricity and gas. With more customers than any other energy company, Genesis Energy truly is ‘everywhere’. Genesis Energy has grown and maintained its customer base by being focused on delivering quality customer services and products to its New Zealand customers.
Now, by participating in the Genesis Energy Share Offer, there’s another way for Kiwis to be part of the Genesis Energy story.
As has been our commitment throughout the share offer programme, the Crown will retain majority ownership of Genesis Energy after the Share Offer is complete. Also, in keeping with our share offer programme commitments, New Zealanders will be at the front of the queue for shares during this Share Offer. For New Zealand retail investors, the price of Genesis Energy Shares will be set at a fixed price per Share prior to the Retail Offer opening, so you will know the price before you decide to apply.
In addition to a fixed price, New Zealand retail investors will also receive one Loyalty Bonus Share for every 15 Shares purchased during the Share Offer, up to a maximum of 2,000 Loyalty Bonus Shares. These Loyalty Bonus Shares will be available to eligible New Zealand Applicants who hold their Shares in the same registered name for 12 months.
This is the final Share Offer in the Government’s share offer programme. Sale proceeds from the Government’s share offer programme currently stand at almost $4 billion. The proceeds from the Genesis Energy Share Offer will be added to New Zealand’s Future Investment Fund and will be reinvested into New Zealand so we can build new assets such as schools, hospitals and ultra-fast broadband, without the need for our country to borrow from overseas lenders.
We look forward to you joining the Crown as a Shareholder in Genesis Energy, the energy company more Kiwis choose to be with.
Yours sincerely
Hon Bill English Hon Tony Ryall MINISTER OF FINANCE MINISTER FOR STATE OWNED ENTERPRISES
2 section ONE Letters from the Crown and chairman Letter from The Chairman
Dear Investor
On behalf of the Genesis Energy board, it is my pleasure to invite you to become an investor in our Company.
By investing in the country’s largest energy retailer you will have the opportunity to share in our delivery of electricity, gas and LPG solutions to more New Zealanders than any other electricity or gas retailer.
At the foundation of providing energy to our customers, Genesis Energy owns and operates a diverse and flexible portfolio of generation assets located in both the North and South Islands. Producing approximately 17% of New Zealand’s electricity in 2013, the Company generates from 10 power stations using water and wind, as well as gas and coal. We have New Zealand’s largest electricity power station at Huntly. These diverse assets allow us to generate electricity in varying weather and hydro lake level conditions.
As an investor, you will also share in Genesis Energy’s 31% interest in the Kupe Joint Venture, which owns and operates the Kupe oil and gas field. The field is an integral part of our business. As well as the Company’s 31% share of the Kupe oil revenues, Kupe gas is used to fuel electricity generation at our Huntly Power Station, and to supply our natural gas and growing LPG retail activities.
Our large base of retail customers, our diverse and flexible generation portfolio, and our interest in Kupe enable us to manage the impact of volatility in the New Zealand electricity market, and this, together with our disciplined capital expenditure, underpins our intention to deliver consistent, reliable and attractive dividends to Shareholders, even in periods of business cycle downturn.
We do not believe significant new electricity generation capacity will be required in New Zealand over the next three to five years and, although we hold consented development prospects, we are not expecting to invest in any major new generation projects in that period. We will continue to apply a disciplined approach to the use of capital funds.
The board is proud of the achievements of Genesis Energy through the hard work of our Chief Executive Albert Brantley and his experienced executive team. Across the Company, we value our relationships with communities, environmental partners and iwi in all parts of the country, and this is reflected in how we carry out all of our business activities.
We are pleased to provide this opportunity for you to be part of what we believe to be a great New Zealand-focused company that delivers for its customers and its Shareholders.
This Investment Statement contains important information about Genesis Energy and the Offer. We encourage you to read the Prospectus carefully and consider the What are my Risks? section before making your investment decision.
The board looks forward to Genesis Energy becoming a publicly listed company and welcomes your participation in this Offer.
Rt Hon Dame Jenny Shipley DNZM CHAIRMAN
Genesis Energy Share Offer investment statement 3 Section TWO offer at a glance
OFFER AT A GLANCE What is this? generation assets and an investment in the Kupe oil and gas field. This is an initial public offering of ordinary shares in Genesis Energy You can find out more about Genesis Energy inSection 4 About Limited by the Crown. Genesis Energy.
Genesis Energy is a New Zealand focused energy company and The Offer comprises the Retail Offer (which in turn comprises a is New Zealand’s largest retailer of electricity and gas.1 This General Offer and a Broker Firm Offer), the Participating Iwi Offer market position is supported by a diverse and flexible portfolio of and the Institutional Offer.
Key Dates 28 29 11 14 March 2014 March 2014 APRIL 2014 APRIL 2014 Final Price announced General Offer and Broker Firm General Offer closes (5.00pm) Broker Firm Offer closes Offer opens (5.00pm)
16 17 17 APRIL 2014 APRIL 2014 APRIL 2014 October 2014 Allotment Date Expected commencement Expected despatch of holding Expected date of payment of of trading on the NZX Main statements and any refund first dividend following Board and the ASX payments if required (no later the Offer than 28 April 2014)
These dates are indicative only and may be amended. If the Crown amends any of the above dates this will be announced through NZX. The Offer may also be withdrawn at any time before the allotment of Shares in the absolute discretion of the Crown.
Key Offer Statistics
Indicative Price Range $1.35 to $1.65 per Share (the Final Price will be announced prior to the Retail Offer opening and may be above, within or below the Indicative Price Range)
Number of Shares being offered2 300,000,000 to 490,000,000 (being between 30% and 49% of the total number of Shares expected to be on issue on the Allotment Date)
Crown shareholding following the Offer3 At least 510,000,000 (being at least 51% of the total number of Shares expected to be on issue on the Allotment Date)
Indicative market capitalisation $1,350 million to $1,650 million
Prospective Net Debt4 $994.3 million
Indicative enterprise value (EV) $2,344 million to $2,644 million
1 Based on Customer Connections for electricity and natural gas as at 31 December 2013. 3 Excluding the Loyalty Bonus Shares and any Shares acquired by entities associated 2 Including the Loyalty Bonus Shares. with the Crown under the Offer. 4 Forecast as at 30 June 2014. See Section 5 Overview of Financial Information for a discussion of non-GAAP financial information.
4 section TWO OFFER AT A GLANCE FY2014 FY2015 Key Investment Metrics Prospective Prospective
Price/earnings ratio 32.3x to 39.5x 14.2x to 17.3x
EV/EBITDAF multiple 7.7x to 8.7x 6.5x to 7.3x
Implied cash dividend yield5 7.8% to 9.5% 9.7% to 11.9%
Implied gross dividend yield5 10.8% to 13.2% 13.5% to 16.5%
These metrics are provided to help you assess the value of the Company. Indicative market capitalisation, indicative EV, prospective price/ earnings ratio, prospective EV/EBITDAF multiple and prospective implied dividend yields are shown based on the lower and upper values of the Indicative Price Range. The calculations are explained in the table set out at the end of the Glossary.
Selected Financial Information FY2012 FY2013 FY2014 FY2015 $million Historical Historical Prospective Prospective
Operating Revenue $2,264.8 $2,070.2 $2,040.6 $2,165.9
EBITDAF $387.3 $336.4 $305.2 $363.4
Net Profit $86.4 $104.5 $41.8 $95.4
Net Assets6 $1,796.6 $1,949.7 $1,871.2 $1,824.5
Net cash inflows from operating activities $363.3 $298.3 $293.3 $344.9
Wherever prospective financial information appears in this Investment Statement (including in the selected financial information and key investment metrics presented in this section) you should read that financial information together with the assumptions set out in the Appendix Prospective Financial Information and also the risk factors set out in Section 6 What are my Risks? There is no guarantee that the results set out in the prospective financial information will be achieved.
The non-GAAP financial information used in this Investment Statement has the following meaning:
EBITDAF Earnings before net finance expense, income tax, depreciation, depletion, amortisation, impairment, revaluations (when they occur), changes in fair value of financial instruments and other gains and losses.
Free Cash Flow EBITDAF less finance expense less income tax expense less stay-in business capital expenditure.7 Free Cash Flow is presented only to enable potential investors to consider Genesis Energy’s prospective dividends declared pay-out ratio. The dividends declared as a ratio of Free Cash Flow highlights how much of Free Cash Flow has been, or is expected to be, converted into dividends.
Net Debt The value of current and non-current borrowings less cash and cash equivalents.
You can find an explanation of trends in financial information and of EBITDAF, and why Genesis Energy uses this non-GAAP measure of financial performance, inSection 5 Overview of Financial Information. A reconciliation of Net Profit to EBITDAF and to Free Cash Flow is also included in Section 5 Overview of Financial Information.
5 Based on the Indicative Price Range. The prospective dividend for FY2014 is inclusive 7 “Stay-in business capital expenditure”, which relates to on-going asset management of the dividend expected to be paid to the Crown in April 2014. There is no assurance and lifecycle maintenance and re-investment programme expenditure and includes that prospective dividends will be paid. capital expenditure on maintaining options for future development but excludes oil 6 Net Assets is calculated as total assets less total liabilities. The amount of total assets and gas rehabilitation and Tekapo canal remediation project capital expenditure. and total liabilities for each of FY2012 and FY2013 has been taken from the audited consolidated statement of financial position (consolidated balance sheet) of Genesis Energy and its subsidiaries as at 30 June 2013 (including comparatives) and has been calculated as at that date and Net Assets has been calculated for FY2012 and FY2013 based on these numbers. Refer to Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 of the Prospectus.
Genesis Energy Share Offer investment statement 5 section TWO Incentives for New Zealand Applicants Your OfFer The Crown is providing incentives to New Zealand Incentives Applicants under the Retail Offer as follows:
Guaranteed allocation 1 (General Offer only) —— Available only to eligible New Zealand Applicants. —— Applications under the General Offer up to $1,000 will not be scaled. —— Applications in excess of $1,000 under the General Offer will not receive less than $1,000 worth of Shares.
Loyalty Bonus Shares 2 —— Available only to eligible New Zealand Applicants. —— Applicants will be entitled to 1 Loyalty Bonus Share for every 15 Shares purchased through the Share Offer. —— Applicants are required to hold their Shares in the same registered name for 12 months. —— Up to a maximum of 2,000 Loyalty Bonus Shares for each eligible New Zealand Applicant.
You can find further information about the eligibility criteria and incentives for New Zealand Applicants, including how these incentives will apply for those New Zealand Applicants applying through Custodians, in Section 7 Terms of the Offer and Section 9 How do I apply?
6 section TWO OFFER AT A GLANCE section THREE
INVESTMENT HIGHLIGHTS
7 Section THREE INVESTMENT HIGHLIGHTS
delivering attractive dividends
Three key features enable us to manage the impact of volatility in New Zealand’s electricity market on our earnings8, and to pay attractive dividends. 1 2 3 nz’s largest Diverse and oil and gas retailer flexible diversification of electricity electricity and gas generation
Prospective fy2015 implied Gross dividend yield9 13.5% to 16.5% Based on the Indicative Price Range
Prospective fy2015 implied CASH dividend yield9 9.7% to 11.9% Based on the Indicative Price Range
By managing its exposure to volatility and with disciplined capital expenditure, Genesis Energy intends to pay Shareholders a consistent, reliable and attractive dividend even in periods of business-cycle downturn. The Company intends to at least maintain, year on year in real terms, the dollar amount of ordinary dividend payments. The amount of dividend declared will be subject to the Company’s capital and risk requirements at the time. Dividends are intended to be paid twice a year with an equal split between interim and final dividends. The table below shows prospective dividends for FY2014 and FY2015 including what this implies as a proportion of Free Cash Flow10. Dividends in the Prospective Period are expected to be fully imputed.
Prospective Dividend Schedule Year ending 30 June 2014 Prospective Year ending 30 June 2015 Prospective
Interim There is no assurance that these dividends will be paid Final 12 Interim Final Total Paid to Crown only Total
Dividends declared ($million)11 128.0 160.0
Dividend per Share (cps) 6.4 6.4 12.8 8.0 8.0 16.0
Date of payment Apr 2014 Oct 2014 Apr 2015 Oct 2015
Free Cash Flow ($million)10 152.8 193.8
Dividends declared as a proportion of 83.8% 82.6% Free Cash Flow
8 Earnings means EBITDAF, a non-GAAP measure defined inSection 2 Offer at a Glance. 11 See Section 8 About the Shares for the Genesis Energy dividend policy. 9 See the Glossary for a definition of this term. 12 Inclusive of the dividend to be paid to the Crown in April 2014. 10 Free Cash Flow is a non-GAAP measure defined inSection 2 Offer at a Glance.
8 section THREE INVESTMENT HIGHLIGHTS delivering attractive dividends New Zealand’s Largest Retailer Three key features enable us to manage the impact of volatility in New Zealand’s 8 of Electricity electricity market on our earnings , and to pay attractive dividends. and Gas
More Kiwis choose Genesis Energy than any other electricity company. We have New Zealand’s largest electricity and gas customer base13 and we take pride in attracting and keeping our customers. This provides scale for developing new products and services and opportunities to lower customer service costs. It also gives us information that helps us to adapt to our customers’ needs and to run our generation more efficiently.
Our large customer base provides stable revenues that help protect overall earnings from the impact of volatile wholesale electricity prices.
13 Based on Customer Connections for electricity and natural gas as at 31 December 2013.
Genesis Energy Share Offer investment statement 9 Section THREE INVESTMENT HIGHLIGHTS
Diverse and Flexible Electricity Generation
Hydro Tongariro/ Waikaremoana/Tekapo — Lower operating cost — Geographic diversity across New Zealand — Flexible generation and storage
Ability to use low cost, geographically diverse and flexible hydro generation and the highly efficient Unit 5 natural gas generation at Huntly to cover our customer demand.
Natural gas Huntly Unit 5 — Highly efficient — Huntly’s newest and largest unit — Operated as Base-load generation with a flexible operating range
Ability to increase Unit 5 generation and use Huntly’s coal and natural gas generation to take advantage of higher wholesale prices (for example, in dry periods).
Coal and natural gas Huntly’s other Units — Higher cost — Used as Peaking and Hydro-firming plant to realise wholesale opportunities
Ability to increase Huntly’s coal and natural gas generation to meet peak market demand and to sell excess Thermal Generation capacity to other electricity companies as insurance against high wholesale prices.
10 section THREE INVESTMENT HIGHLIGHTS oil and gas diversification kupe oil and Genesis Energy’s 31% interest in the Kupe gas field oil and gas field joint venture is an integral part of the business. Kupe provides a diversified source of revenue largely unaffected by electricity market dynamics. Genesis Energy receives a 31% share of all Kupe’s oil, natural gas and LPG production. It has secured 100% of Kupe’s natural Oil gas to make electricity at Huntly — Sold internationally and to sell to retail and wholesale gas customers. There is also the opportunity to influence and share in any future Natural gas — Used to make electricity development of the Kupe field. — Sold to retail and wholesale customers Kupe contributed $109.2m of total Genesis Energy LPG EBITDAF in FY2013 — Sold to customers
Kupe Estimated Proved Reserves and Probable Reserves as at 31 December 2013
45 40 35 30 25 20 15 10 5
Millions of Barrels of Oil Equivalent Millions of Barrels 0 Oil Natural Gas LPG
Source Gaff ney, Cline & Associates
Genesis Energy Share Offer investment statement 11 section FOUR
ABOUT GENESIS ENERGY
Genesis Energy is a diversified energy company. It sells electricity, natural gas and LPG through its Customer Experience business. It generates electricity, and trades electricity and natural gas, through its Energy Management business. The Company has a 31% interest in the Kupe Joint Venture which owns the Kupe oil and gas field.
12 THE ELECTRICITY SECTOR
As an energy company that generates, trades and sells electricity, Genesis Energy operates in the New Zealand electricity industry, which comprises the following key components:
NEW ZEAlANd ElECTRICITy INdUSTRy
dIRECT CONSUMERS $
WhOlESAlE $ ElECTRICITy MARkET
$ COMMERCIAl USERS RESIdENTIAl USERS
GENERATION TRANSMISSION dISTRIbUTION RETAIlERS
Major generators State-owned national Distribution businesses Electricity retail brands serving produced about 93% of transmission grid with 150,000km of 1.7 million residential customers, 5 NZ’s electricity in 2013 1 operator 29 network lines 20 0.3 million commercial customers Payments in relation to the wholesale electricity market Electricity fl ows
Generators – generate electricity The National Grid – Transpower Distribution Businesses – own the Retailers – buy electricity from at power stations throughout the is the owner and operator of the distribution networks that carry the wholesale market and sell it to country and sell that electricity to national grid which comprises electricity from the national grid end-consumers, at market prices the wholesale market. the towers, wires and cables to residential, commercial and determined by each electricity that transport electricity at high some industrial users. There are retailer. The five largest retailers voltages from power stations to currently 29 separately owned had a combined 94% market share distribution networks and directly distribution networks. by Customer Connections as at to large industrial users throughout 31 December 2013. the country.
Regulators – The Electricity Authority oversees the electricity market. A number of other regulatory authorities also have roles.
Most New Zealand electricity generation and retailing is undertaken by five large generator/retailers: Genesis Energy, Meridian, Contact Energy, Mighty River Power and Trustpower.
Genesis Energy Share Offer investment statement 13 Section FOUR About Genesis Energy
Generation Retailers New Zealand’s electricity is generated mainly from hydro, Most New Zealand consumers buy their power from electricity geothermal and wind resources (called Renewable Generation) retailers that have purchased electricity from the wholesale market. and natural gas, coal and diesel (called Thermal Generation). The retailers generally arrange installation of appropriate metering, meter reading, billing and payment collection, and pay distribution The amount of electricity produced from each power station charges to distribution businesses in relation to electricity sold to depends on a wide range of factors that continuously change, consumers. Retail electricity prices are determined by competition including demand for electricity, climate conditions, transmission among the nation’s electricity retailers and, aside from a constraints, fuel cost and availability, and competitor behaviour. Due requirement to provide an optional low-user tariff, are to the large proportion of hydro generation (56% of total generation generally not directly regulated. in 2013) and because New Zealand’s hydro systems can store only limited amounts of water for future use, higher or lower-than- average rainfall or snowmelt can have a significant impact on which power stations run to meet the demand for electricity. This, in turn, affects wholesale electricity prices.
Electricity Generation Market Share Electricity Customer Market Share
35% 30% 31.4% 26.8%
30% 30% 25% 25.8% 22.4% 25% 19.4% 20%
20% 20% 16.8% 16.8% 14.0% 15.5% 15% 15% 11.0% 10% 10% 6.9% 6.4% 3.5% 5% 5% 3.5%
0% 0% 0% Genesis Contact Mighty Meridian Trustpower Other Genesis Contact Mighty Meridian Trustpower Other Genesis Contact Mighty Meridian Trustpower Other Energy Energy River Power Energy Energy River Power Energy Energy River Power
Source Electricity Authority, 2013 Source Electricity Authority, 2013 Source Electricity Authority, Customer Connections as at 31 December 2013
14 section FOUR ABOUT GENESIS ENERGY Consumers poor economic conditions in New Zealand, reduced demand from There are approximately two million individual electricity Customer the Tiwai Point aluminium smelter, reduced demand following the Connections in New Zealand.14 The North Island accounted for Canterbury earthquakes and relatively flat demand from large 63% of total electricity consumption in 2012. The remaining 37% industrial manufacturing. was consumed in the South Island. While the majority of Customer Electricity consumption also follows daily and seasonal patterns. Connections are residential, electricity consumption is split between Demand is typically lower in warm months and can increase by residential, commercial and industrial users. This is illustrated in the more than 30% during winter. graph below. New Zealand Electricity Consumption Electricity market mechanics The wholesale electricity market determines the wholesale price 40,000 on a half hourly basis (also called the ‘spot price’) by matching
35,000 the supply of electricity from generators with demand from users (electricity retailers and some large industrial customers). 30,000 Electricity companies that are both generators and retailers do 25,000 not supply their customers with the electricity they generate. 20,000 Instead, they sell their generation into the wholesale market at the connection nearest their power station, and buy electricity
GWh per annum GWh 15,000 to supply their customers at the connection nearest the location 10,000 of their customers. Being on both sides of the wholesale market (as sellers and buyers) allows the generator/retailer companies to 5,000 better manage the risk of wholesale price variability. For example, 0 if wholesale electricity prices rise, these companies can at least 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 partially offset the increased cost for their retail businesses with Residential Commercial Industrial the higher wholesale prices they receive from their generation businesses – and vice versa if wholesale prices fall. This is a benefit Source MBIE Energy Data of vertical integration (that is, being a generator and a retailer). Historically, over the long-term, residential household demand has moved broadly in line with population growth, and overall electricity demand has tended to move in line with economic growth. National demand has been relatively flat or has declined in each of the four years since 2007 to 2012 (being the most recent year for which data is available). This is due to a combination of factors including
Key Industry Issues regulatory reform which would involve significant structural As described in Section 6 What are my Risks? and more fully in changes. These changes could adversely affect electricity the Prospectus, there are a number of potential changes facing generators and retailers. the electricity industry in New Zealand which may have an Electricity Transmission Pricing – The allocation of the costs impact on the industry as a whole and on Genesis Energy in the of electricity transmission is under review. This review may future, the most notable of which are: change the cost allocated to each electricity generator, although Tiwai Point Aluminium Smelter – The Tiwai Point aluminium the timing and nature of the changes, including the ability for smelter is the largest consumer of electricity in New Zealand. increased costs to be passed on to consumers, is currently If the smelter were to significantly reduce its electricity uncertain. consumption, or to cease consumption altogether, the resultant Water Rights – The use and allocation of New Zealand’s drop in demand could lead to a sustained reduction in wholesale freshwater resources is under review, including as a result of electricity prices (at the location specified in the Tiwai contract) claims under the Treaty of Waitangi. The outcomes of this and in electricity prices generally. review may have an impact on the availability and/or cost of Potential industry restructuring – On 18 April 2013 the water available to electricity generators. Again, the timing New Zealand Labour Party and the Green Party of Aotearoa and potential impact on the electricity generation industry is New Zealand announced separate proposals for electricity sector currently uncertain.
14 Based on Electricity Authority Customer Connections as at 31 December 2013.
Genesis Energy Share Offer investment statement 15 Section FOUR About Genesis Energy
CUSTOMER EXPERIENCE
In this part of the business, Genesis Energy sells electricity, natural gas and LPG. Genesis Energy is focused on attracting and keeping valuable customers. It aims to achieve this by delivering practical energy solutions, competitive pricing and quality customer service.
Retail Brands 17 Genesis Energy sells electricity, natural gas and LPG to more than 650,00015 Customer Connections through its two retail brands, Genesis Energy and Energy Online. 26.8% Electricity Natural Gas LPG Electricity Market Share Brand Market Customers Customers Customers
Nationwide brand 473,000 114,000 10,700
18
Selected regions. 67,300 1,500 - “No frills” brand, for 43.7% customers looking for Gas Market Share service at competitive prices
Dual Fuel Customers The Company’s dual fuel offering delivers benefits for both customers and the Company. For customers, it provides the convenience of accessing both electricity and gas from one energy provider, while reducing customer switching and costs for the Company.
As at 31 December 2013: —— 70% of Genesis Energy’s natural gas customers also purchased electricity from the Company; and —— 15% of the Company’s electricity customers also purchased natural gas from the Company.16 5% West Coast Nationwide Coverage Genesis Energy seeks to maintain a customer base that broadly complements its generation portfolio in terms of both size and location. The map opposite shows the largest customer centres. The percentage figures in the map reflect the percentage of customers in each region who are Genesis Energy customers (circle size relative to approximate numbers of customers).
15% Otago 6% Southland 15 Based on Electricity Authority Customer Connections for electricity and Gas Industry Company Customer Connections for natural gas and customer accounts for LPG as at 31 December 2013. 16 Note that only 13% of New Zealand electricity customers are able to access natural gas.
16 section FOUR ABOUT GENESIS ENERGY 21% Electricity Market Share and Growth Northland Genesis Energy is the largest electricity retailer in New Zealand with a 26.8% market share.16 The Company successfully grew its South Island customer base following its acquisition of the Tekapo Power Scheme in the South Island in 2011. The Company aims to grow the value of its customer base throughout New Zealand. 19% Auckland Advanced Metering As at 31 December 2013, approximately 355,000 (66%) of Genesis Energy’s electricity customers were using advanced meters. These meters are owned by a subsidiary of Vector Limited, with Genesis Energy receiving the data from the 46% meters. This enables Genesis Energy to provide accurate and Waikato 16% up to date monthly billing and to roll out pricing and service Bay of Plenty plans that appeal to customers interested in monitoring and controlling their electricity usage. Advanced metering services 13% also assist Genesis Energy with its objective of reducing the cost Gisborne of serving its customers.
43% Attracting Customers Taranaki 39% Hawke’s Bay Genesis Energy offers a range of products, services and pricing 42% plans to suit the needs of its residential, commercial and industrial Manawatu/ customers. Genesis Energy believes that high levels of customer Wanganui service, ‘keeping it simple’ and putting customers in control of their accounts and the way they use energy, are key drivers of customer attraction and retention.
2% Keeping Customers for Longer Tasman Although varying from month to month, Genesis Energy had an 48% average electricity customer switching rate of 18% for the year to 8% Wellington Marlborough 31 December 2013 compared to an industry average of 20%.19 Genesis 5% Energy believes that its focus on delivering competitive prices, Nelson practical solutions and good customer service, together with its dual fuel offering helped keep its switching rate below the industry average. Keeping this rate down helps to reduce costs and improve margins for the Company.
Benefits of Large Customer Base Genesis Energy’s large customer base provides stable revenues that help protect its overall earnings from the impact of volatile wholesale electricity prices, since retail prices are largely independent of short- term wholesale electricity prices. This customer base also provides the 22% Company with opportunities to lower its customer service costs and the Canterbury potential to develop products and services in a cost-effective manner.
The Company has low financial exposure to any individual customer with no single customer representing more than 0.9% of the Group’s revenue per annum.20
Gas and LPG Customers Genesis Energy is the largest natural gas retailer in New Zealand with a 43.7% market share.18 Since 2010, Genesis Energy has grown its natural gas and LPG customer numbers and sales volumes in both the retail and wholesale markets.
LPG sales volumes have grown from 210 tonnes in FY2010 to 2,445 tonnes in FY2013. Natural gas volumes have increased from 9.5 PJ in FY2010 to 17.6 PJ in FY2013. As with its electricity business, the 17 Based on Electricity Authority Customer Connections as at 31 December 2013. Company’s natural gas customer switching rate is lower than is the 18 Based on Gas Industry Company Customer Connections as at 31 December 2013. 19 Based on Electricity Authority switching history reports. industry average. Although varying from month to month, Genesis 20 As at 31 December 2013 and based on FY2013 revenue. Energy had an average natural gas customer switching rate of 12% in 2013 compared to an industry average of 17%.
Genesis Energy Share Offer investment statement 17 Section FOUR About Genesis Energy
ENERGY MANAGEMENT
In this part of the business, Genesis Energy generates electricity and trades electricity and gas with wholesale customers.
Generation Genesis Energy owns and operates a portfolio of Thermal Generation and Renewable Generation assets located in different parts of New Zealand. The spread of locations and fuel types in the portfolio gives Genesis Energy significant operating flexibility because: —— at Huntly Power Station, the Rankine Units can be run on gas or coal, Unit 5 runs on gas and Unit 6 can be run on gas or diesel; 10 Power stations and —— the spread of the Company’s hydro assets minimises its reliance on one water catchment area. The hydro stations provide flexibility for two further reasons. Firstly, they can start generating relatively quickly, and secondly, some water inflows into the Company’s hydro catchment areas can be stored (for Kupe Oil and GAS Field varying periods of time), which allows generation to be made available when desired as long as seasonal inflows are sufficient. 31% interest
Tekapo Key Resource Site Fuel Source Capacity Commissioned Consents Expire
A Hydro 25 MW 1951 2025
B Hydro 154 MW 1977 2025
18 section FOUR ABOUT GENESIS ENERGY Huntly Key Resource Site Fuel Source Capacity Commissioned Consents Expire Rankine Units Gas or Coal 250 MW each Between 1982 2037 and 1985
Unit 5 Gas 403 MW 2007 2037
Unit 6 Gas or Diesel 50.8 MW 2004 2037
Approximately
of New Zealand’s electricity output 17% in 2013
of electricity production in 2013 32% from renewable sources
Hau Nui Key Resource Site Fuel Source Capacity Commissioned Consents Expire Stage 1 Wind 2.5 MW 1996 2030
Stage 2 Wind 4.8 MW 2004 2037
tongariro Key Resource Site Fuel Source Capacity Commissioned Consents Expire Mangaio Hydro 1.8 MW 2008 2039
Rangipo Hydro 120 MW 1983 2039
Tokaanu Hydro 240 MW 1973 2039
waikaremoana Key Resource Site Fuel Source Capacity Commissioned Consents Expire Tuai Hydro 60 MW 1929 2032
Piripaua Hydro 42 MW 1943 2032
Kaitawa Hydro 36 MW 1948 2032
Genesis Energy Share Offer investment statement 19 Section FOUR About Genesis Energy
of readiness that could see it return to service, if required, within 90 days. However, the Company expects a return to three Rankine Units in active service would be considered only under exceptional circumstances.
The operation of a fourth Rankine Unit has ceased permanently and the Company has commenced the decommissioning process. Unit 6 – 50.8 MW (Gas/Diesel) Unit 6 is a 50.8 MW open cycle gas turbine, which was commissioned in 2004. This unit can burn 100% gas or diesel to generate electricity. Unit 6 is operated as a Peaking unit when wholesale electricity prices reach high levels or when it is economic to operate it over short periods.
Fuel Supply Genesis Energy has fuel supply security at Huntly through a range of gas and coal contracts. Generally its gas supply contracts require HUNTLY POWER STATION a set volume to be purchased per year (known as a take or New Zealand’s Largest pay contract). The 1,203.8 MW Huntly Power Station is New Zealand’s largest The majority of wholesale gas market contracts are long-term power station by capacity and is capable of providing over 20% of take or pay contracts. This means that Genesis Energy is required New Zealand’s current electricity needs. This station is located close to pay for the majority of the gas volumes it has contracted to to major population centres, has reliable access to cooling water, purchase, whether or not it takes the gas. A feature of the natural coal and gas resources, and benefits from limited transmission gas supply contracts is that they provide Genesis Energy with constraints. This, together with long-term resource consents, means flexibility to increase its electricity generation levels in times of that the Huntly Power Station is expected to continue to provide increased demand and high wholesale prices and to supply other Genesis Energy with both a valuable asset and a range of future natural gas users through short or longer term gas contracts. A key development options. disadvantage is that, when customer demand for electricity is low The Huntly Power Station has the ability to provide Base-load due to seasonal, operational or electricity market conditions, or generation while also being able to take advantage of higher when water inflows are high, it may be more economical for Genesis prices in the short or medium term. The mix of generating units Energy to reduce gas-fired generation and generate electricity described below is likely to change over time as older gas/ from its own hydro or coal fired plant or to increase the amount coal-fired generation units are placed into long-term storage, of electricity purchased from the electricity market relative to the retired or replaced. amount generated by Genesis Energy but the take or pay provisions instead may result in Genesis Energy using gas as fuel. In addition, the Huntly Power Station plays an important role in supporting financial contracts offered by the Company to other Currently, Genesis Energy has contracted to purchase more natural retailers and large customers as dry period ‘insurance’, and in gas than it requires for the operation of its existing Thermal providing ancillary services such as frequency and voltage support. Generation plant and its retail customers’ usage (this is called having a “Long gas position” or being “Long on gas”). Genesis Currently, Huntly comprises the following units: Energy applies a range of measures to manage its Long gas Unit 5 – 403 MW (Gas) position, however, despite these, the Company’s Long gas position Unit 5 is a high-efficiency combined-cycle gas turbine, which was had an adverse impact on the Company’s financial performance commissioned in 2007. Unit 5 is operated as Base-load generation during the period from mid FY2010 to FY2013. It is also forecast to with a flexible operating range. The total generation from Unit 5 have an adverse impact in the Prospective Period. These impacts and the Company’s hydro stations broadly matches the Company’s have been incorporated into the historical and prospective financial customer demand for electricity. information set out in Section 5 Overview of Financial Information of this Investment Statement and Section 6.0 Financial Information of Rankine Units - Two 250 MW units (Gas/Coal) with an the Prospectus. additional 250 MW unit in storage The Rankine Units utilise boiler and steam turbine technology and The financial impact on Genesis Energy of having a Long gas are capable of using coal and gas to generate electricity. The two position from 1 July 2015 is unknown as it will depend on a range Rankine Units currently in service were commissioned between of factors including the extent of its Long gas position and market 1982 and 1985 and can each generate 250 MW. These units have conditions at the time. the capacity to operate in a range of roles, including Base-load, Hydro-firming and Peaking.
A Rankine Unit was placed into long-term storage at the end of 2013, with the intention of lowering the overall overhead and maintenance costs of the three units and improving the utilisation of the two remaining Rankine Units in service. This unit is stored at a level
20 section FOUR ABOUT GENESIS ENERGY Genesis Energy expects that the extent of its Long gas position will reduce between 2015 and 2020, and be eliminated by 2021.21
The Huntly Power Station is capable of storing up to four years of coal supply.22 Coal storage is important as it enables the Company to quickly increase generation output to mitigate gas supply interruptions, cover generation reductions from other sources and to take advantage of high wholesale electricity prices. As at 31 December 2013 Genesis Energy had a coal stockpile of 994 kT fully covering the amount of coal expected to be used in the Prospective Period.
Rights of and Obligations Owed to Waikato-Tainui Genesis Energy leases the land on which the Huntly Power Station is located from Tainui Corporation Limited, a subsidiary of Tainui Group Holdings Limited, the commercial arm of Waikato-Tainui.
Under the Waikato-Tainui Raupatu Claims (Waikato River) Settlement Act 2010, Genesis Energy must engage with Waikato- Tainui prior to the creation or disposition of any property right or interest in the Waikato River relating to an asset held by Genesis Energy (such as the Huntly Power Station). In addition under that Act, Waikato-Tainui has a right of first refusal in respect of Genesis Energy’s lease of the Huntly Power Station (including fixtures and improvements at Huntly), if Genesis Energy proposes to transfer the Huntly Power Station or any part of it to a third party. This first right of refusal is not triggered by the Offer.
Resource Consents to 2037 In May 2012, 25 year resource consents were granted for the Generation Development Prospects generation capacity at Huntly which secure the site’s future as a It is not expected that significant additional electricity long-term generation site of national significance. This reflects its generation capacity will be required in New Zealand over the critical role in supplying electricity and important ancillary services next three to five years. In the short term, Genesis Energy’s such as frequency and voltage support. focus is to maximise the efficiency of the Company’s existing See Section 4.4 Independent Engineer’s Summary Report on generation assets and fuel supplies, and to purchase from Generation Assets and Kupe Facilities of the Prospectus for the wholesale market effectively, rather than to build new an independent engineer’s findings on Genesis Energy’s generation assets. generation assets. However, the Company has a diverse portfolio of longer term generation growth prospects to increase capacity or to displace higher-cost generation in the future. These prospects include greenfield generation investments and opportunities for enhancing existing thermal, hydro and wind assets. Consistent with the Company’s disciplined approach to the use of capital, these development prospects would proceed only if a project becomes economically viable.
An example is the Castle Hill Wind Farm, where Genesis Energy holds resource consents to establish a wind farm in the northern Wairarapa. The potential site covers more than 20,000 hectares and the consents allow up to 286 wind turbines with a potential generation capacity of up to 860 MW. Should this proceed, its scale is yet to be determined. The terms of the consents give Genesis Energy until 2023 to begin construction. Arrangements for transmission have not been established.
21 The year in which the Long gas position peaks, and the profile for its reduction over the period 2015 to 2020, will depend on a range of factors, including the actual volumes of gas used for electricity generation and retail sales, whether Genesis Energy varies the quantity of contracted gas purchases and whether contingent reserves become firm at one of the gas fields from which the Company purchases gas. 22 Based on forecasted coal use and stockpile capacity as at 31 December 2013.
Genesis Energy Share Offer investment statement 21 Section FOUR About Genesis Energy
Generation vs Customer Demand The chart below illustrates how Huntly Unit 5 and the Company’s hydro stations broadly meet Genesis Energy’s customer demand, while enabling the other Huntly units to be used to take advantage of higher-priced opportunities in the market.
Generation vs Customer Demand
1,000
900
800
700
600
500 GWh
400
300
200
100
0 Jul-11 Jul-12 Jul-13 Jan-11 Mar-11 Sep-11 Nov-11 Jan-12 Jan-13 May-11 Mar-12 Mar-13 Sep-12 Sep-13 Nov-12 Nov-13 May-12 May-13 Nov-10
Huntly Unit 5 + Hydro Huntly Rankine Units + Unit 6 Customer Demand
Trading In addition, Genesis Energy can earn revenue from its generation Genesis Energy aims to generate and contract electricity at the capacity outside of a dry period by offering other retailers and large lowest cost to the Company to meet its customer demand. The customers financial contracts that allow them to manage the risk Company also aims to maximise the value of its excess Thermal of high wholesale electricity prices during such periods (effectively Generation capacity during periods of higher wholesale providing dry period ‘insurance’) in return for a fee. electricity prices. Genesis Energy entered into a range of significant electricity Genesis Energy’s mixture of Thermal Generation and Renewable Derivative contracts as a result of the electricity market reforms Generation gives it the ability to take advantage of a range of undertaken in 2010. The Company also enters into electricity wholesale electricity prices and market conditions. Genesis Energy Derivative contracts to minimise the risk of changes in wholesale can use coal and gas to fuel its Thermal Generation units to market prices or electricity market conditions affecting its financial take advantage of periods of higher wholesale electricity prices. performance. You can find out more about these contracts inSection Alternatively, it can use Renewable Generation to generate electricity 4.0 About Genesis Energy of the Prospectus. at a lower cost when water is abundant.
Genesis Energy actively participates in both the New Zealand wholesale electricity market and the New Zealand Electricity Futures and Options market run by the ASX.
The Company monitors movements in wholesale electricity pricing to take advantage of opportunities to buy and sell electricity positions and to support a number of risk-management products that the Company both offers into and buys from the market.
22 section FOUR ABOUT GENESIS ENERGY KUPE Oil and Gas
Genesis Energy, through three wholly owned subsidiaries, has a Reflecting its 31% interest in the Kupe Joint Venture, Genesis Energy 31% interest in the Kupe Joint Venture which owns the Kupe oil and receives 31% of the natural gas produced. In addition, it has entered gas field that lies in the offshore Taranaki basin. Kupe is an integral into long-term contracts with the other joint venture partners to part of the Company’s business and provides a diversified source of purchase the remainder of the current natural gas produced and revenue for the Company. Genesis Energy is an active participant in has rights in respect of all future production of natural gas from the the Kupe Joint Venture which gives it an opportunity to influence Kupe oil and gas field. Genesis Energy sells natural gas to its retail and share in any development of the Kupe oil and gas field. customers in the North Island or uses it for electricity generation at the Huntly Power Station. The Company also sells surplus natural In FY2013, this interest contributed approximately 32% of Genesis gas on the wholesale natural gas market. Energy’s EBITDAF. Since starting commercial production in 2010, earnings from the Kupe Joint Venture have been consistent, in line Oil with the stable production levels from Kupe. Genesis Energy receives revenue from the sale of its 31% share The other Kupe Joint Venture participants are Origin Energy of oil from Kupe. In 2012, Kupe produced approximately 11% Limited (which, through its subsidiaries, has a 50% interest and is of New Zealand’s total production of oil and condensate. the operator of the Kupe oil and gas field), New Zealand Oil & Gas Approximately 95% of the oil and condensate produced in Limited (which, through its subsidiaries, has a 15% interest) and New Zealand in 2012 was exported. Mitsui E&P Australia Pty Limited (which has a 4% interest). LPG Kupe’s assets comprise three wellheads, an unmanned offshore LPG is a secondary product of oil and gas production. Genesis platform, a 30 km pipeline and subsea utilities umbilical cable to Energy receives 31% of the LPG produced by Kupe which it sells to an onshore production station near Hawera, oil storage facilities its customers. at New Plymouth and an onshore gas pipeline. Kupe commenced commercial production in March 2010 and is an important part Reserves of New Zealand’s energy infrastructure. It is expected to meet The initial Kupe reserves estimates were reviewed for the Kupe approximately 11% of New Zealand’s annual gas demand and Joint Venture in July 2010 and June 2012. These reviews resulted approximately 50% of New Zealand’s anticipated LPG demand in increases to the initial reserves estimates and an extension of until 2025. Kupe oil, natural gas and LPG production is driven by the anticipated life of the field into the late 2020s. The Kupe Joint long-term natural gas contracts which provide for fixed annual Venture’s reserves estimates as at 30 June 2012 were reviewed by production levels, however, volumes may vary from year to year an independent expert23, who found them to be reasonable. The due to natural decline, actual production rates and the timing independent expert provided updated reserves estimates as at of shipments. 31 December 2013. See Section 4.5 Independent Expert’s Summary Report on Kupe Reserves and Resources of the Prospectus for an See Section 4.4 Independent Engineer’s Summary Report on independent expert’s findings on Kupe reserves. Generation Assets and Kupe Facilities of the Prospectus for an independent engineer’s findings on the Kupe assets.
23 Gaffney, Cline & Associates (Consultants) Pte Limited (“GCA”) is an independent Report on Kupe Reserves and Resources of the Prospectus). GCA is not, nor does it international energy advisory group of more than 50 years’ standing whose expertise intend to be, a director, officer or employee of either Genesis Energy or the Crown. includes petroleum reservoir evaluation and economic analysis (a detailed discussion However, GCA has provided, and may in the future provide, professional advisory of GCA’s qualifications is included inSection 4.5 Independent Expert’s Summary services to Genesis Energy.
Genesis Energy Share Offer investment statement 23 Section FOUR About Genesis Energy
PEOPLE, COMMUNITY AND THE ENVIRONMENT
The quality of Genesis Energy’s operational, safety and financial performance relies strongly on the well-being, capabilities and performance of its more than 900 employees. The health, safety and well-being of its employees, contractors and others are of paramount importance to Genesis Energy.
The Company continues to target world-class performance in health and safety and has recently implemented a number of initiatives to drive improvement in health and safety across all the Company’s activities.
The Company continually works to build enduring relationships with local communities, iwi and other stakeholders.
The Company seeks to have proactive and constructive relationships with iwi in relation to matters of mutual interest within their respective rohe. The types of relationships that Genesis Energy has with iwi are many and varied, from being a tenant on Māori-owned land, to agreements on how the two parties will work together to address effects of the Company’s activities on iwi, to proactive initiatives that support hapū/iwi development, while also creating wider environmental and community benefits.
BOARD OF DIRECTORS
Rt Hon Dame Rukumoana Joanna Perry Jenny Shipley Schaafhausen Deputy Chairman Chairman
John Dell Andrew Clements John Leuchars Graeme Milne
24 section FOUR ABOUT GENESIS ENERGY Genesis Energy understands that the way in which it operates leaves an environmental footprint, whether as a result of emissions from fuel used at Huntly Power Station, emissions from vehicles used for staff travel or the impact on the natural habitats around the Company’s generation sites. The Company’s environmental performance measures and targets include zero abatement, infringement and enforcement notices under the Resource Management Act 1991. In 2013, Genesis Energy received no such notices.
You can find more information on Genesis Energy’s board and executive management team and corporate governance practices in the Prospectus.
EXECUTIVE MANAGEMENT
Dean Schmidt Andrew Steele Andrew Donaldson General Manager General Manager Chief Financial Officer Strategy and People and Safety Corporate Affairs Maureen Shaddick Michael Fuge General Counsel and Albert Brantley Chief Operating Company Secretary Chief Executive Officer
Genesis Energy Share Offer investment statement 25 Section FOUR About Genesis Energy
RELATIONSHIP BETWEEN GENESIS ENERGY AND THE CROWN
After completion of the Offer, the Crown, acting by and through Under the Public Finance Act, Genesis Energy is required to the Shareholding Ministers, will continue to be Genesis Energy’s provide The Treasury certain limited information that is not publicly majority shareholder with a holding of at least 51% of the Shares in available to enable The Treasury to prepare the Government’s the Company.24 The Crown does not guarantee the Shares or any consolidated financial statements. This information comprises returns in respect of them or the Company or any obligations of monthly financial statements, and five-year forecasts which are the Company. submitted twice a year. The Company and the Crown have entered into a confidentiality agreement in respect of such information. As the majority owner, the Crown generally will be able to control the outcome of all resolutions put to Shareholders, including the The Crown is a party to the Treaty of Waitangi with Māori. Treaty election and removal of directors. obligations lie only with the Crown and not with companies or individuals. However, the way the Crown responds to Treaty claims The Chairman nominated by the board must be approved by the and the Crown’s relationship with Māori may have implications for Minister of Finance. Genesis Energy. Due to the ownership restrictions in the Public Finance Act and the A claim has been lodged in the Waitangi Tribunal alleging that Constitution, any future equity capital raising that involves issuing Ngāti Ruapani has proprietary interests in Lake Waikaremoana, any shares or other voting securities of Genesis Energy will be able and that such interests are compromised by the use of the lake to proceed only if the Crown agrees to participate to the extent by Genesis Energy for hydro-generation. The Waitangi Tribunal required to maintain an interest of at least 51%. Any decision by issued a decision on 28 February 2014 agreeing to hold an urgent the Crown on whether to make equity capital available to Genesis hearing on whether the applicant’s ability to seek redress for Treaty Energy will be made by the Government at the time and will take of Waitangi breaches is impaired by the sale of Shares in Genesis into account all relevant factors, including competing capital Energy. The Crown has made a number of commitments to Ngāti requirements. The Crown’s decisions regarding capital allocation Ruapani in connection with that claim, which may have implications may be critical to any equity capital raising Genesis Energy wishes for Genesis Energy’s water permits. The Crown considers that these to undertake in the future. commitments address the issues raised by the claimant in relation Transactions between the Crown and its associates and Genesis to the Genesis Energy Share sale. See Section 4.3 Relationship Energy that exceed certain materiality thresholds, as set out in Between Genesis Energy and the Crown of the Prospectus under the NZX Listing Rules or the ASX Listing Rules, will require the the heading “Waitangi Tribunal Claims” for more information. approval of Genesis Energy’s Shareholders. The Crown and its The Public Finance Act provides that nothing in Part 5A of that associates will not be entitled to exercise its voting rights in favour Act (mixed ownership model companies) permits the Crown to act of any resolution to approve such a transaction unless a waiver is inconsistently with the principles of the Treaty. granted by NZX and/or ASX (as the case may be). NZX and ASX have each granted a waiver to permit the Company to enter into certain agreements with Transpower without obtaining Shareholder approval where those agreements exceed the relevant materiality thresholds. The waivers are described in Section 7.2 Statutory Information of the Prospectus.
24 In addition, Shares may be acquired by other entities who are part of the Crown such as the managers of the New Zealand Superannuation Fund.
26 section FOUR ABOUT GENESIS ENERGY section FIVE
Overview of Financial Information
27 Section FIVE OVERVIEW OF FINANCIAL INFORMATION
OVERVIEW OF FINANCIAL INFORMATION
This section provides an overview of financial information. Audited Main factors driving financial Group financial statements for FY2013 and for H1 2014 along with performance and cash flows summary financial statements for the Group for FY2009 to FY2013 Genesis Energy is a relatively complex business with a number of and H1 2013 and H1 2014 are set out in the Prospectus. The historical important drivers of financial performance. The following factors financial information included in this section has been extracted can have a significant impact on annual financial performance from Genesis Energy’s audited consolidated financial statements and net cash flows, but are not an exhaustive list of all relevant and unqualified audit opinions were received for each of those factors. This should be read in conjunction with “Explanation of financial statements other than the financial statements for H1 2013 Trends in Financial Performance” later in this section as well as the which have not been audited. section What are my Risks? in this Investment Statement and in the Genesis Energy has prepared PFI for FY2014 and FY2015 in Prospectus. accordance with Financial Reporting Standard No. 42 “Prospective Financial Statements” for inclusion in the Prospectus and the Retail Market Conditions Appendix - Prospective Financial Information. The PFI provided Customer retail sales prices and sales volumes determine the in this section has been extracted from this information. The PFI revenue earned by Genesis Energy from selling electricity and gas includes historical trading results for the six month period to 31 to end customers. A change in retail competition, national demand December 2013, based on audited interim financial statements. and average temperatures can lead to material changes in sales The PFI is forward looking and based on certain assumptions, and volumes, prices and operating costs, and can have an impact on therefore involves risks and uncertainties. Actual results could profit margins. A relatively small change in volumes and prices can differ from those expressed or implied by such forward looking substantially affect margins. Refer to the assumptions “Customer statements, with factors that could cause such differences electricity and gas revenue” and the related sensitivity analysis including, but not limited to, those discussed in the section What in the Appendix - Prospective Financial Information for further are my Risks? in this Investment Statement and in the Prospectus. information. You should read the basis of preparation, assumptions and Wholesale Price of Electricity sensitivities relating to the prospective financial information (as detailed in the Appendix - Prospective Financial Information) so Volatility in the wholesale price of electricity over a period of that you fully understand the prospective financial information. months or longer affects generation volumes Genesis Energy offers to the market, and electricity revenues, Derivatives and Certain information included in this section (including EBITDAF) is fuels consumed. Lower wholesale electricity prices tends to non-GAAP financial information. You can find an explanation of why drive lower Thermal Generation as well as lowering the cost of Genesis Energy uses this measure of financial performance later in purchasing electricity by Genesis Energy to supply customers. this section. A reconciliation of Net Profit to EBITDAF and to Free The opposite tends to happen when wholesale electricity prices Cash Flow is also included later in this section. increase. The most important factors driving variability in wholesale electricity prices are supply and demand of electricity, with A summary of how Genesis Energy supply being particularly affected by the availability of water for makes money hydro generation (which has a relatively lower operating cost of The following provides a simplified overview of how Genesis Energy generation), discussed further below. makes money as an introduction to assist in reading the detail in the The wholesale price over time can have a significant impact on rest of this section. both generation volumes and revenues and the cost of purchasing Genesis Energy’s financial information reflects the performance electricity to supply Genesis Energy’s customers. of its integrated energy portfolio, through which Genesis Energy seeks to: Generation Output —— sell electricity, natural gas and LPG to its retail customers The volume of Genesis Energy’s generation output affects the (residential, small to medium enterprises and commercial and revenue it earns from selling electricity into the wholesale market. industrial) and wholesale customers at competitive prices; For Genesis Energy this is primarily driven by: —— minimise the costs associated with providing strong customer —— variable wholesale electricity prices (referred to above) which service and product innovation; affect the economics of Thermal Generation (which is a relatively —— buy and trade electricity and natural gas for its customers; more expensive form of generation); —— efficiently generate electricity from its renewable and thermal —— variable hydrological conditions at the hydro power stations of power stations which is sold into the national wholesale Genesis Energy and its competitors; and electricity market; —— availability and utilisation of generation assets (that is, planned —— optimally source coal, natural gas and LPG used to generate and unplanned outages). electricity or to on-sell to its wholesale and retail customers; Coal and gas fired generation at the Huntly Power Station costs —— maximise the benefit from its share of the outputs produced by more to run, relative to other forms of generation such as hydro, the Kupe oil and gas field; and and is influenced by wholesale electricity prices and the availability —— operate head office corporate services efficiently and with and cost of coal and gas (see Section 4 About Genesis Energy for greater cost control. further information on the Huntly Power Station). Genesis Energy
28 section FIVE OVERVIEW OF FINANCIAL INFORMATION will typically increase Thermal Generation from all units when 23 December 2013. Genesis Energy’s BBB+ long-term credit rating wholesale prices are higher, as the higher price compensates for the is one notch higher than its stand alone credit profile rating (BBB) higher cost of fuel. to reflect S&P’s view of the benefit of the Company’s status as a Government-owned entity. S&P has noted that the one notch higher Genesis Energy’s hydro generation is affected by water inflows and rating is likely to be maintained while the Crown owns more than lake storage levels. The level of water in the storage lakes above 50% of Genesis Energy. Genesis Energy’s hydro power stations depends on the amount of rain and/or snow melt in the catchment area for each lake. The On the S&P long-term rating scale, the stand alone ‘BBB’ rating impact of hydrological conditions on Genesis Energy’s hydro power indicates that the entity has adequate capacity to meet its financial stations typically varies between Genesis Energy’s hydro schemes, commitments, but adverse economic conditions or changing due to their geographic dispersion and locations in distinct circumstances are more likely to lead to a weakened capacity to hydrological catchments. meet its financial commitments than a higher rated entity.
Genesis Energy’s generation production can also change due to Seasonality outages in its power stations. Most outages are planned well in Electricity consumption follows daily and seasonal patterns. advance to carry out scheduled maintenance or mid-life upgrades, Demand is typically lower in warm months and can increase by however, unplanned outages can also occur, for example due to more than 30% during winter months. Fluctuations in seasonal equipment failures. weather patterns have a significant impact on supply of, and Kupe Production Volumes and Prices demand for, electricity and therefore on financial performance. Kupe provides Genesis Energy with a diversified source of revenue, Capital Expenditure which is not affected by changing hydrological conditions. Genesis In addition to ongoing and relatively consistent capital expenditure Energy shares in the outputs from, and the cost of operations to maintain its assets, Genesis Energy has periodically made large of, the Kupe oil and gas field. Kupe contributed 32% of total investments in new capital assets. Given that demand for additional Genesis Energy EBITDAF in FY2013, and is forecast to contribute electricity generation capacity in New Zealand is not expected to approximately one third of total Genesis Energy EBITDAF in FY2014 grow significantly in New Zealand over the next three to five years, reducing to approximately one quarter in FY2015. the Company does not expect to invest in any major new generation Kupe oil, natural gas and LPG production is driven by long-term projects in the Prospective Period. Genesis Energy therefore expects natural gas contracts which provide for fixed annual production to have more cash available to be reinvested in the Company or to levels, although, volumes can vary (by 10 to 15%) due to a range pay down debt or to be returned to Shareholders. of factors including natural decline in reserves, actual production rates and shipping schedules. Reflecting its 31% interest in the Kupe Joint Venture, Genesis Energy receives 31% of the natural gas, oil and LPG produced. Genesis Energy has also entered into long-term contracts with the other Kupe Joint Venture parties to purchase the remainder of the natural gas currently produced.
Genesis Energy on-sells some of the natural gas (except for the natural gas used in the generation of electricity) and the oil and the LPG. The revenue derived by Genesis Energy from the sale of oil, natural gas and LPG produced at Kupe is linked to external market prices (including, in the case of gas, the international price for methanol and the Producers Price Index). Therefore changes in the Producers Price Index and market prices affect the revenue derived by Genesis Energy and its profit margin. In addition, the revenue derived from the sale of oil and some of the revenue derived from the sale of LPG is denominated in foreign currencies and therefore movements in the exchange rate between those currencies and the New Zealand dollar also influences profit margins. Genesis Energy hedges a proportion of its oil revenues to reduce the impact of spot price fluctuations on oil revenue. Credit Rating Genesis Energy targets a long-term credit rating25 of BBB+ from Standard & Poor’s (Australia) Pty Ltd (“S&P”). Genesis Energy’s BBB+ rating (with a stable outlook) was re-affirmed by S&P on
25 A long-term credit rating is an expression of the general creditworthiness and credit quality of an entity based on an analysis of quantitative and qualitative metrics and refers to an entity’s ability and willingness to honour its existing debt responsibilities. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by an assigning rating agency.
Genesis Energy Share Offer investment statement 29 Section FIVE OVERVIEW OF FINANCIAL INFORMATION
Overview of financial performance You can find a full description of assumptions and sensitivities relating to the prospective financial information for FY2014 and FY2015 in the Appendix – Prospective Financial Information.
FY2012 FY2013 FY2014 FY2015 H1 2013 H1 2014
$ million Historical Historical Prospective Prospective Historical Historical
Electricity revenue 1,923.2 1,743.9 1,691.3 1,844.1 877.0 809.2
Gas revenue 235.8 212.5 261.0 244.0 108.4 117.7
Petroleum revenue 85.8 80.5 81.3 68.3 34.2 42.6
Other revenue 20.0 33.4 7.0 9.4 11.7 3.6
Total operating revenue 2,264.8 2,070.2 2,040.6 2,165.9 1,031.3 973.1
Electricity purchases, transmission and distribution (1,004.9) (920.0) (912.8) (1,025.3) (449.5) (422.8)
Gas purchases and transmission (249.4) (217.2) (257.2) (235.4) (109.7) (113.9)
Petroleum production, marketing and distribution (35.0) (31.5) (30.1) (28.5) (14.5) (14.5)
Fuels consumed (288.4) (259.9) (203.1) (212.4) (112.6) (95.3)
Employee benefits (80.8) (83.6) (87.0) (85.2) (41.5) (45.6)
Other operating expenses (219.0) (221.7) (245.2) (215.6) (107.6) (130.4)
Total operating expenses (1,877.5) (1,733.8) (1,735.4) (1,802.4) (835.4) (822.5)
EBITDAF 387.3 336.4 305.2 363.4 195.9 150.6
Depreciation, depletion and amortisation (152.1) (135.0) (157.8) (150.2) (67.0) (81.2)
Impairment of non-current assets (12.4) (6.6) (9.5) (13.5) (0.7) (3.6)
Change in fair value of financial instruments (11.3) 30.5 (3.9) 4.1 10.1 (2.6)
Other expenses26 (3.1) (0.6) (0.3) - (1.7) (0.3)
Profit before net finance expense 208.4 224.8 133.7 203.8 136.7 62.8 and income tax
Net finance expense27 (88.6) (78.5) (71.1) (70.5) (38.0) (34.1)
Profit before income tax 119.8 146.3 62.6 133.3 98.7 28.7
Income tax expense (33.4) (41.8) (20.8) (37.9) (27.9) (9.0)
Net Profit 86.4 104.5 41.8 95.4 70.8 19.7
Earnings per share28 (cents) 8.6 10.5 4.2 9.5 7.1 2.0
Dividend declared per share28, 29 (cents) - 11.4 12.8 16.0 5.7 6.4
Overview of trends in Net Profit amortisation and lower EBITDAF partially offset by lower interest Trends in Net Profit are influenced by a range of non-cash items and and tax expenses; and interest and tax costs. For example: —— FY2015 Net Profit is forecast to improve significantly compared —— FY2013 Net Profit of $104.5 million was a 21% increase on FY2012 to FY2014, reflecting improved EBITDAF offset by higher tax despite a lower EBITDAF, driven by items below EBITDAF expense. including reduced depreciation, depletion and amortisation expenses, a $42 million positive increase in the change in fair value of financial instruments, with lower interest costs offset by higher tax expenses; —— FY2014 Net Profit is forecast to be approximately 60% lower than FY2013 due to an adverse swing in the change in fair value of financial instruments, higher depreciation, depletion and
26 “Other expenses” consists of revaluation of generation assets (when they occur) and 28 Based on the number of Shares expected to be on issue on the Allotment Date being other gains and losses relating to foreign exchange and disposals of assets. 1 billion shares. 27 Finance revenue less finance expense. 29 There is no assurance that prospective dividends will be paid.
30 section FIVE OVERVIEW OF FINANCIAL INFORMATION Key operating metrics (unaudited)30
FY2012 FY2013 FY2014 FY2015 H1 2013 H1 2014
Historical Historical Prospective Prospective Historical Historical
Electricity sales - retail (GWh) 5,429 5,354 5,497 5,694 2,797 2,875
Electricity purchases (GWh) 5,781 5,693 5,814 6,018 2,960 3,018
Avg retail electricity purchase price ($/MWh) - 96.44 76.88 68.57 79.10 66.53 53.98 LWAP
Retail gas sales31 (PJ) 5.4 5.0 6.3 6.9 2.9 3.1
Thermal Generation (GWh) 5,654 4,991 4,097 4,114 2,273 1,875
Renewable Generation (GWh) 2,813 2,221 2,570 2,845 1,513 1,468
Total generation (GWh) 8,467 7,212 6,667 6,959 3,786 3,343
Avg price received for generation ($/MWh) - 91.10 75.59 71.95 82.18 64.77 54.55 GWAP
Time weighted average wholesale electricity price 58.20 to 65.50 to at the Huntly node ($/MWh) 85.77 73.40 68.20 75.50 63.52 53.30
Explanations of the Non-GAAP Financial Information EBITDAF Genesis Energy’s financial statements have been prepared in EBITDAF is earnings before net finance expense, income tax, accordance with NZ GAAP. As such, they comply with NZ IFRS, as depreciation, depletion, amortisation, impairment, revaluations well as IFRS. (when they occur), changes in fair value of financial instruments and other gains and losses. In order to assist readers of Genesis Energy’s financial statements to better understand Genesis Energy’s financial performance, Genesis EBITDAF is a non-GAAP profit measure that has been reported in Energy uses three non-GAAP financial measures being EBITDAF, historical financial statements and therefore is shown in the financial Free Cash Flow and Net Debt. information presented in the PFI. Genesis Energy’s management uses EBITDAF to evaluate operating performance of Genesis Energy Because they are not defined by NZ GAAP, IFRS, or any other body without the impact of a range of non-cash items (depreciation, of accounting standards, Genesis Energy’s calculation of these depletion, amortisation, impairment, revaluations (when they measures may differ from similarly titled measures presented by occur), fair value movements of financial instruments and other other companies. These measures are intended to supplement gains or losses) or the effects of Genesis Energy’s capital structure the NZ GAAP measures presented in Genesis Energy’s financial and tax position. information and not as a substitute for those measures. Genesis Energy considers EBITDAF allows better comparison of operating performance with other electricity industry companies than do NZ GAAP measures that include these items, although caution should be exercised as other companies may calculate EBITDAF differently. EBITDAF should not be considered in isolation or as a substitute for NZ GAAP measures, such as Net Profit and cash flow measures.
30 Operating metrics have not been audited and may differ from those reported in 31 Excludes gas sold to wholesale customers (comprising large industrial and Genesis Energy’s annual reports due to different sources (see specific footnotes) or petrochemical customers). due to changes in measurement.
Genesis Energy Share Offer investment statement 31 Section FIVE OVERVIEW OF FINANCIAL INFORMATION
Reconciliation of Net Profit to EBITDAF and to Free Cash Flow
FY2012 FY2013 FY2014 FY2015 $million Historical Historical Prospective Prospective
Net Profit32 86.4 104.5 41.8 95.4
Income tax expense 33.4 41.8 20.8 37.9
Net finance expense 88.6 78.5 71.1 70.5
Impairment of non-current assets 12.4 6.6 9.5 13.5
Change in fair value of financial instruments 11.3 (30.5) 3.9 (4.1)
Other expenses33 3.1 0.6 0.3 -
Depreciation, depletion and amortisation 152.1 135.0 157.8 150.2
EBITDAF 387.3 336.4 305.2 363.4
Less finance expense (91.4) (79.3) (71.5) (70.5)
Less income tax expense (33.4) (41.8) (20.8) (37.9)
Less stay-in business capital expenditure34 (51.7) (59.8) (60.1) (61.2)
Free Cash Flow 210.8 155.5 152.8 193.8
Dividends declared nil35 114.0 128.036 160.036
Dividends declared as a % of Free Cash Flow n/a 73.3% 83.8% 82.6%
Free Cash Flow Free Cash Flow is calculated as EBITDAF less finance expense less income tax expense less stay-in business capital expenditure.34
Free Cash Flow is a non-GAAP financial measure presented only to enable potential investors to consider Genesis Energy’s prospective dividends declared pay-out ratio.
The dividends declared as a ratio of Free Cash Flow highlights how much of Free Cash Flow has been, or is expected to be, converted into dividends.
Net Debt
As at 30 As at 30 As at 30 June As at 30 June June 2014 June 2015 $million 2012 Historical 2013 Historical Prospective Prospective
Current borrowings 16.5 412.9 11.3 114.7
Term borrowings 1,003.0 612.0 1,007.5 834.2
Total borrowings 1,019.5 1,024.9 1,018.8 948.9
Less cash and cash equivalents (24.8) (22.7) (24.5) (24.5)
Net Debt 994.7 1,002.2 994.3 924.4
Net Debt is defined as the value of current and non-current borrowings less cash and cash equivalents. Net Debt is a metric commonly used by investors as a measure of Genesis Energy’s indebtedness that takes account of liquid financial assets. The table above sets out the calculation of Net Debt.
The Net Debt position is forecast to improve in FY2015 post the Tekapo canal remediation project capital expenditure completing in FY2014.
32 NZ GAAP financial measure. 35 $nil in FY2012 to assist the Company with the funding of the purchase of the Tekapo 33 “Other expenses” consists of revaluation of generation assets (when they occur) and Power Scheme (which was acquired in June 2011). other gains and (losses). 36 There is no assurance that prospective dividends for FY2014 and FY2015 will be paid. 34 “Stay-in business capital expenditure”, which relates to on-going asset management and lifecycle maintenance and re-investment programme expenditure and includes capital expenditure on maintaining options for future development but excludes oil and gas rehabilitation and Tekapo canal remediation project capital expenditure.
32 section FIVE OVERVIEW OF FINANCIAL INFORMATION Explanation of trends in financial Overview of Historical EBITDAF for FY2013 performance FY2013 EBITDAF decreased from $387.3 million to $336.4 million, The chart below summarises the movement in EBITDAF over the reflecting: last five years, H1 2014 and the PFI. This chart allows for comparison —— A reduction in generation volumes and wholesale electricity of historical EBITDAF to that forecast in the Prospective Period. prices both of which were approximately 15% lower than Historical financial performance is further discussed inSection 6.4 in FY2012, primarily as a result of a return to more average Historical Operational and Financial Information of the Prospectus. hydrology (neither particularly wet nor dry) in the South Island. —— Notably for Genesis Energy, wholesale prices were 31% higher Genesis Energy EBITDAF Trends in the second half of the year compared to H1 2013 due to a drought primarily centred in the North Island. Genesis Energy
$450 had limited ability to adjust its generation profile to benefit from $387.3m this as a result of a planned outage at the Tekapo Power Scheme. $400 $363.4m $336.4m Management estimates this constraint had a negative impact $350 $305.2m $292.7m on EBITDAF of $20 million to $25 million (you can find out $300 more about this constraint and the impact on Genesis Energy in $248.8m $250 Section 6.0 Financial Information of the Prospectus). $202.4m $m $200 —— EBITDAF was also affected by an abnormal under-recovery
$150 of some lines charges from retail customers (approximately $8 million) due to significantly higher than expected increases $100 in lines charges being incurred by Genesis Energy that were $50 not passed on to customers. This was offset by Genesis Energy’s 0 share of insurance proceeds of $18.6 million which recovered FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 costs incurred in relation to the Kupe subsea utilities
Historical Prospective umbilical cable. H1 H2 Prospective Overview of Forecast EBITDAF for FY2014 FY2014 EBITDAF is forecast to decrease from $336.4 million to Summary financial information for the full five year historical $305.2 million, reflecting: period (FY2009 to FY2013) is included in Section 6.4.3 Historical —— Suppressed generation output volumes (7.6% lower than FY2013) Consolidated Summary Financial Information of the Prospectus. consistent with lower annual average wholesale electricity prices FY2012 onwards is considered most useful for potential investors reflecting flat national demand and relatively high hydro inflows as there were notable changes in the business with the June and storage and above average temperatures. 2011 purchase of the Tekapo Power Scheme and the successful —— One-off operating expenses of $26.2 million representing costs development of the Kupe oil and gas field, which had its first full of this Offer of approximately $10.0 million and a termination 37 year of production in 2011. The chart shows higher EBITDAF in fee and related onerous contract provisions of $16.2 million FY2012 with annual average wholesale electricity prices above $75/ associated with the exit of a coal import contract. MWh with drier than average conditions driving higher electricity —— As in FY2013, Genesis Energy will be adversely affected by revenues. Below is an overview of the primary drivers of Genesis the planned outage at the Tekapo Power Scheme. This outage Energy’s year on year EBITDAF performance for FY2012 to FY2015. is expected to be shorter than the outage in FY2013, and is estimated to have a lesser negative impact on EBITDAF than in Overview of Historical EBITDAF for FY2012 FY2013, at between $8 million and $12 million. FY2012 was a record year for Genesis Energy, with EBITDAF —— Improved EBITDAF from electricity and natural gas sales which increasing from $292.7 million to $387.3 million, reflecting: is expected to offset some of the above costs. —— High annual average wholesale electricity prices which were 58% higher than in FY2011, due to dry weather in the South Overview of Forecast EBITDAF for FY2015 Island combined with plentiful water and cooler than average FY2015 EBITDAF is forecast to increase from $305.2 million to temperatures in the North Island. This enabled Genesis Energy $363.4 million, reflecting: to increase utilisation of both North Island hydro stations and its —— An uplift in generation volumes of 4.4% from those forecast Thermal Generation assets. in FY2014 assuming average hydro inflows and corresponding —— An increase in total generation of 30% due to the full year contribution higher annual average wholesale electricity prices. from the Tekapo Power Scheme (+805 GWh), acquired in June 2011, —— Average electricity sales volumes per customer increasing with and increased Thermal Generation as a result of high wholesale a return towards average temperatures. electricity prices. —— No one-off operating expenses, no significant planned outages and operating cost savings from the exit of the coal import and related supply chain contracts in late 2013.
37 Genesis Energy has a 31% interest in the Kupe Joint Venture.
Genesis Energy Share Offer investment statement 33 Section FIVE OVERVIEW OF FINANCIAL INFORMATION
Significant or Unusual Events In FY2012, FY2013 and forecast for FY2014 there are one-off or infrequently occurring costs and benefits that should be considered by a potential investor. These are explained below and presented in tabular format.
FY2012 FY2013 FY2014 FY2015 H1 2013 H1 2014 $million Note Historical Historical Prospective Prospective Historical Historical
EBITDAF 387.3 336.4 305.2 363.4 195.9 150.6
Significant or unusual events:
The outage of the Tekapo Power Scheme 1 - 20 to 25 8 to 12 - - -
Offer costs 2 1.0 0.6 10.0 - 0.1 2.4
Contract termination fee and related 2 - - 16.2 - - 19.1 onerous contracts
Abnormal under-recovery of lines charges 3 - 7.7 - - 7.7 -
Insurance compensation and related costs 3 4.0 (18.5) - - - -
Total impact on EBITDAF of removing the 5.0 9.8 to 14.8 34.2 to 38.2 - 7.8 21.6 significant or unusual events
Tax effect of the above 4 (1.4) (2.6) to (4.0) (6.8) to (7.9) - (2.2) (5.3)
Total impact on Net Profit 3.6 7.2 to 10.8 27.4 to 30.3 - 5.6 16.3
Notes to the above table: 3. EBITDAF in FY2013 was also affected by an abnormal under- recovery of some lines charges of $7.7 million due to significantly 1. The outage of the Tekapo Power Scheme for the remediation higher than expected lines charges being incurred that were of the Tekapo canal in Q3 and Q4 of FY2013 and Q3 of FY2014 not passed on to customers and by Genesis Energy’s share reduced the Company’s total hydro generation, and therefore of insurance proceeds of $18.6 million which recovered costs revenue, with a significant negative impact on EBITDAF incurred in relation to the Kupe subsea utilities umbilical cable estimated to be in the range of $20 million to $25 million in in FY2013 and earlier years. FY2013 and forecast in the range of $8 million to $12 million 4. The tax effect is calculated based on an income tax rate of 28% in FY2014. on taxable items. 2. The PFI for FY2014 also includes non-recurring items for
the costs related to this Offer of approximately $10 million
(a further $1.6 million was incurred prior to FY2014) and a
contract termination fee and related onerous contract provisions
of $16.2 million for the exit of the coal import contract (net of estimated sub-lease revenue).
34 section FIVE OVERVIEW OF FINANCIAL INFORMATION Overview of Consolidated Balance Sheet
As at As at As at As at As at 31 December 30 June 2012 30 June 2013 30 June 2014 30 June 2015 2013 $million Historical Historical Prospective Prospective Historical
Total assets 3,630.2 3,751.2 3,685.1 3,547.2 3,667.5
Total liabilities 1,833.6 1,801.5 1,813.9 1,722.8 1,757.9
Net Assets38 1,796.6 1,949.7 1,871.2 1,824.5 1,909.6
Including:
Net Debt 994.7 1,002.2 994.3 924.4 958.3
Non-current property, plant and equipment and oil and gas assets are the most significant asset items meaning depreciation and depletion and capital expenditure (together with revaluations, when they occur) have the most significant effect on Net Asset movements in the Balance Sheet.
In the Prospective Period Net Assets reduce primarily with depreciation, depletion and amortisation exceeding forecast capital expenditure. In FY2013 there was a revaluation increase in generation assets of $155.6 million. The Net Debt position is forecast to improve in FY2015 following the completion of the Tekapo canal remediation project capital expenditure in FY2014.
Overview of Consolidated Operating Cash Flow
FY2012 FY2013 FY2014 FY2015 H1 2013 H1 2014 $million Historical Historical Prospective Prospective Historical Historical
Net cash inflows from operating activities 363.3 298.3 293.3 344.9 217.9 164.6
Net cash outflows from investing activities (69.5) (172.6) (97.6) (64.1) (93.2) (32.5)
Net cash outflows from financing activities (290.1) (127.9) (193.9) (280.8) (110.6) (106.4)
Net movement in cash and cash equivalents 3.7 (2.2) 1.8 - 14.2 25.7
Net cash inflows from operating activities approximates EBITDAF with movements over the historical years and the Prospective Period reflecting movements in EBITDAF and working capital. Net cash outflows from investing activities primarily relates to spend on capital expenditure with cash outflows from financing primarily relating to repayment of borrowings and dividends.
38 Net Assets is calculated as total assets less total liabilities. The amount of total assets sheet of Genesis Energy and its subsidiaries as at 31 December 2013 and has been and total liabilities for each of FY2012 and FY2013 has been taken from the audited calculated as at that date. Refer to the Prospectus at Section 6.4.4 Audited Interim consolidated statement of financial position (consolidated balance sheet) of Genesis Financial Statements for the Six Months Ended 31 December 2013. Net Assets as at Energy and its subsidiaries as at 30 June 2013 (including comparatives) and has been 31 December 2013 has been calculated based on these numbers. Total assets, total calculated as at that date. Refer to the Prospectus at Section 6.4.5 Audited Financial liabilities, Net Assets and Net Debt for the six months ended 31 December 2012 are not Statements for the Year Ended 30 June 2013. Net Assets as at 30 June 2012 and 2013 included in this Investment Statement as they were not required to be included in the has been calculated based on these numbers. The amount of total assets and total audited interim balance sheet of Genesis Energy and its subsidiaries for the six months liabilities as at 31 December 2013 has been taken from the audited interim balance ended 31 December 2013. This information is contained within the Prospectus.
Genesis Energy Share Offer investment statement 35 section SIX
What are My Risks?
36 What are my risks?
Your Shares will be fully paid and you will not have liability to make Tiwai Point aluminium smelter – the Tiwai Point aluminium smelter any further payments for them. However, you may not be able to accounted for approximately 13% of New Zealand electricity get back any or all of your investment and you may not receive the demand in 2012. If New Zealand Aluminium Smelters closes its returns you expect. This could be because you are unable to sell Tiwai Point aluminium smelter or significantly reduces its electricity your Shares for the price you paid for them (or at all) or because consumption, Genesis Energy may be adversely affected. This is the dividends are less than you expect. because a closure or significant reduction in electricity consumption could result in a reduction in wholesale electricity prices, and in The principal risks that may have an impact on Genesis Energy’s electricity prices generally. The size of these price reductions, both business or financial results, and which could reduce or eliminate in the short term and ongoing, and any consequential adverse the value of your Shares or the returns on them, are set out below. effects on Genesis Energy’s financial performance, would depend A full description of the risks that may have an impact on your on many variables, which are referred to in Section 3.1 The Electricity investment is set out in Section 5.0 What are my Risks? in the Sector and Section 5 What are my Risks? of the Prospectus. Genesis Prospectus. Energy understands that the earliest date at which any such Adverse Prices and Volumes reduction could take effect would be 1 January 2015, but there is Retail electricity sales – the volume and price at which Genesis no certainty as to whether, or when, or the level at which, any such Energy is able to sell electricity to customers can materially reduction could occur and, therefore, the nature and extent of any influence Genesis Energy’s financial performance. Volume and impact on Genesis Energy is not known. price may be adversely affected by competitor behaviour (such Regulatory Changes as discounted pricing) and customer behaviour (such as reduced Labour-Green proposed market reform – on 18 April 2013 the demand due to increased energy efficiency). They can also be New Zealand Labour Party and the Green Party of Aotearoa adversely affected by factors that affect longer-term wholesale New Zealand announced separate proposals for electricity sector electricity prices, which are referred to below. These include regulatory reform which would, if implemented, involve significant generation capacity being increased before it is required in the changes to the electricity industry. It is uncertain whether either market, a significant gas discovery, a reduction in demand in the party will have the political opportunity to implement its respective industrial sector, adverse conditions in the New Zealand economy, proposals. While the implementation, timing and final details of adverse regulatory changes or overall warming of the climate. these proposals are uncertain, their implementation, as currently Wholesale electricity prices – the wholesale price at which Genesis proposed, would have a material adverse effect on Genesis Energy. Energy sells electricity it generates, or buys electricity it sells to Transmission pricing methodology – Genesis Energy uses the customers, may be unfavourable in the short, medium or longer national grid to transmit electricity. The Electricity Authority is term. The following factors (alone or in combination with others) currently reviewing the transmission pricing methodology, which could have a significant or material adverse effect on Genesis determines the basis for setting transmission charges related to Energy’s financial performance: the operation and development of the national grid and how these —— Medium-term wholesale price drivers: Adverse changes costs will be allocated to users of the grid. The changes proposed sustained over a period of months in hydrological and climatic by the Electricity Authority, if implemented, may materially increase conditions, and power station availability; Genesis Energy’s costs and also adversely affect the income —— Longer-term wholesale price drivers: The wholesale price expected from existing arrangements. It is unclear what proportion over time can have a significant impact on both generation of this additional cost would be able to be passed through to volumes and revenues and the cost of purchasing electricity consumers. The Electricity Authority is currently consulting on to supply Genesis Energy’s customers. The level of customer its proposal. However, the outcome of this consultation process demand relative to supply from generators is a key determinant remains uncertain and it is unclear what, if any, changes will be of electricity prices over the longer term. A fall in demand, made to the transmission pricing methodology and what the timing or excess generation supply, may adversely affect wholesale of any changes will be. The Electricity Authority does not expect to and retail prices, potentially for a sustained period. These may release its second issues paper on this subject prior to the second arise from a range of factors including adverse changes in the half of 2014. Genesis Energy anticipates that any changes to the level of activity in the industrial sector, competitor behaviour, transmission pricing methodology arising from this review would be regulatory changes, a significant gas discovery, population unlikely to be implemented before 2016. growth, economic conditions, technological advances in the more efficient use and generation of electricity (including Regulatory change to the electricity market (excluding Labour- by customers, potentially as a consequence of regulatory Green proposed market reform) – there is a risk, separate from the subsidisation of competing technologies) and weather. In a reforms proposed by the Labour Party and the Green Party, that competitive market, such longer term changes in wholesale the Government or regulators (including the Electricity Authority) prices influence retail prices. may seek to regulate or influence the structure or operation of the wholesale and retail markets or introduce measures that may increase Genesis Energy’s costs or restrict the type or extent of
Genesis Energy Share Offer investment statement 37 Section SIX What are my risks?
its operating activities. This could include a moratorium or other Operational failure – an operational failure, which includes operator significant set of restrictions on building or operating Thermal error, made in the operation of one or more of Genesis Energy’s Generation plant, which could have an adverse impact on the power stations or related infrastructure could have a significant future use or development of the Huntly site and other Thermal adverse effect on the Company, the electricity market and/or the Generation prospects. environment or cause harm to Genesis Energy’s people.
Charge on use of water – the Government is in the process of Electricity transmission infrastructure (hardware) failure – developing reforms for freshwater and resource management Genesis Energy is reliant on third parties for the transmission and systems (although it is not clear if or when such reforms will take distribution of electricity. This exposes the Company to the risk of effect). Genesis Energy could be adversely affected by these planned or unexpected transmission or distribution failures (such as reforms if they impose restrictions or conditions on its generation a transmission failure in the national grid operated by Transpower activities (both hydro and thermal) or if they impose a pricing or a failure at a line operated by a distribution company). The regime on water or additional costs on its generation activities that electricity transmission and distribution systems in New Zealand are the Company is not able to pass on to customers. susceptible also to a range of unpredictable natural hazards such as floods, heavy snowfalls, earthquakes, cyclones and solar flares. Infrastructure Failure or Operating Limitations Catastrophic events – a single (or multiple) catastrophic event(s) Financial Losses from Contracts (such as a significant earthquake, volcanic eruption, landslide, fire, Adverse changes in respect of Kupe revenue – revenue derived by flood, explosion, act of terrorism or other disaster) could result in Genesis Energy from the sale of oil, gas and LPG produced from the losses considerably greater than Genesis Energy’s material damage Kupe oil and gas field is linked to external market prices. Changes in and business interruption insurance limit, which is currently $880 these prices, as well as in the international price of oil and methanol million, in respect of Genesis Energy’s assets, other than its Kupe and movements in foreign exchange rates, could affect Genesis interests. Genesis Energy has separate insurance arrangements in Energy’s revenue and its profit margin. place in respect of its interests in the assets associated with the Thermal fuel risks – Genesis Energy has gas purchase contracts in Kupe oil and gas field, which is currently covered for losses up to place with various suppliers (including for natural gas produced $617 million. from Kupe). As a result of the volume and long-term take or pay Maui pipeline outages – Genesis Energy relies on third-party service nature of such contracts, a significant quantity of this contracted providers to deliver gas to its large industrial customers, and to gas is in excess of the Company’s requirements for generation and the Huntly Power Station for use as fuel in its Thermal Generation gas retailing. units. Prolonged outages in the Maui pipeline could significantly The Company’s Long gas position had an adverse impact on affect Genesis Energy’s ability to generate electricity and also affect Genesis Energy’s financial performance from mid FY2010 to FY2013. delivery of gas to customers. It is also forecast to have an adverse impact during the Prospective Kupe infrastructure failure – Kupe’s infrastructure could be affected Period. These impacts have been incorporated into the historical by a single (or multiple) catastrophic event(s) (such as a significant and prospective financial information set out inSection 5 Overview earthquake, volcanic eruption, landslide, fire, flood, explosion, of Financial Information of this Investment Statement and Section act of terrorism or other disaster or adverse weather conditions 6.0 Financial Information of the Prospectus. (including serious storms)), or suffer from prolonged failure of The financial impact on Genesis Energy of having a Long gas structures or systems, which could in turn adversely affect Genesis position from 1 July 2015 is unknown as it will depend on a range Energy’s earnings. Also, a catastrophic plant failure could result in of factors including the extent of its Long gas position and market an oil spill or other uncontrolled discharge of oil or gas (or other conditions at the time. substances) into the environment. Significant costs and liabilities could be incurred by Genesis Energy, as a participant in the Kupe Genesis Energy expects that the extent of its Long gas position will Joint Venture, in remediating any environmental damage resulting reduce between 2015 and 2020, and be eliminated by 2021.39 from such a spill and any such event could have adverse effects on Genesis Energy’s reputation.
Failure of key plant – Genesis Energy relies upon key equipment and technology at each of its power stations. If material items of equipment or technology suffer failures requiring unplanned power station outage and replacement or repair, the Company’s generation production may be reduced and significant capital expenditure may be required to replace or repair such assets. Genesis Energy holds spare parts for many important components, however, the Company does not hold spares for all of its equipment. In particular, a failure in Unit 5 at the Huntly Power Station (including the transformer) could have a significant adverse effect on Genesis Energy’s generation output and on the revenue that Genesis Energy would otherwise have derived. 39 The year in which the Long gas position peaks, and the profile for its reduction over the period 2015 to the end of 2020, will depend on a range of factors, including the actual volumes of gas used for electricity generation and retail sales, whether the Company varies the quantity of contracted gas purchases, and whether contingent reserves become firm at one of the gas fields from which the Company purchases gas.
38 section SIX What are my risk? Other Principal Risks Treaty of Waitangi – national freshwater and geothermal resources claim – a second hearing of the Waitangi Tribunal will consider whether Māori rights and interests in relation to water and geothermal resources are adequately recognised and provided for and whether Crown policies are in breach of the Treaty of Waitangi. The Government will need to consider whether any recommendations of the Waitangi Tribunal should result in a change of Government policy in relation to the management of freshwater in New Zealand or an acceleration of its current proposed reforms. These reforms are likely to include greater consideration being given to iwi interests before council decisions on freshwater planning are made. Such reforms or changes in Government policy may impose restrictions, conditions or additional costs on Genesis Energy’s access to freshwater and those additional costs may not able to be passed on to customers. In addition, other claims by Māori to interests in land or other resources may, if successful, adversely affect Genesis Energy.
Treaty of Waitangi – land claims and memorials – land of which Genesis Energy is either the legal or equitable owner may be subject to claims from Māori. The titles (where titles have been issued) to some of the properties on which Genesis Energy’s power stations are located are subject to memorials under the State- Owned Enterprises Act 1986. These memorials mean that, in certain circumstances, the Waitangi Tribunal has the power to order the return of the land to Māori ownership. In relation to the land in the Waikaremoana Power Scheme and the Tongariro Power Scheme to which Genesis Energy is yet to receive legal title, it is intended that memorials will be registered upon the transfer of legal title to Genesis Energy. Pending such transfer, the Waitangi Tribunal powers of resumption also apply in respect of such land. There is a risk that, if land used by the Company were to be resumed and returned to Māori ownership, the compensation paid to the Company under the relevant legislation may not be sufficient to cover the full extent of the losses incurred by the Company.
Reputation – Genesis Energy’s business is large, complex and highly specialised which presents a number of reputational risks. The Company could be adversely affected should it, or the industry generally, suffer from adverse publicity. The effect on Genesis Energy could be a reduction in sales or increase in costs, which may affect financial performance.
These and other risks are more fully described in the Prospectus. You should carefully consider these risks before making your investment decision.
Consequences of Insolvency You will not be liable to pay any money to any person if Genesis Energy becomes insolvent. If Genesis Energy is liquidated then all claims by its creditors will rank ahead of any entitlement of Shareholders to any distribution. Each Share confers an equal right to participate in any such distribution. However, any distribution made on liquidation of Genesis Energy may be less than the amount of your investment or you may not receive any amount.
Genesis Energy Share Offer investment statement 39 section SEVEN
Terms of The offer
40 section FOUR ABOUT GENESIS ENERGY Terms of the Offer
The Crown is offering to sell 300,000,000 to 490,000,000 Shares If the total dollar amount of Shares you apply for and the value in the Company, representing between 30% and 49% of the (based on the Final Price) of the Shares you receive differs by Shares on issue. This includes the Loyalty Bonus Shares to which more than the Final Price due to scaling of your Application, this New Zealand Applicants may become entitled under the terms of difference will be refunded to you no later than five Business Days the Offer. after the Allotment Date without interest. If this difference is less than the Final Price, it will be retained by the Crown. The Offer comprises the Retail Offer (which in turn comprises a General Offer and a Broker Firm Offer), the Institutional Offer and If you apply for a total Application amount that is not a multiple the Participating Iwi Offer. of the Final Price, your Application will be rounded down to the nearest multiple of the Final Price and any difference will be How Much Do I Pay? retained by the Crown. You will pay the Final Price per Share, determined following the ‘bookbuild’ process discussed below. The Final Price is Refunds will be paid in the manner you elect any future dividend expected to be announced and posted on the Offer website payments to be paid. www.genesisenergyshares.govt.nz and under Genesis Energy’s How is Pricing of the Shares Fixed? stockcode ‘GNE’ on www.nzx.com on or about 28 March 2014. The Final Price for the Shares will be determined on or about As the Final Price will be known when you make your Application 28 March 2014 following a ‘bookbuild’ managed by the Joint Lead for Shares, you will be asked to apply for a number of Shares Managers. The bookbuild is a process through which information multiplied by the Final Price which will give a total Application is collated about the demand for Shares by selected Institutional amount. Investors including NZX Firms submitting bids for the number of Shares they wish to purchase or be allocated at a range of prices. The minimum Application amount under the Retail Offer is $1,000. That information is then used to assist with the determination of the The Crown reserves the right to accept Applications for less than pricing and allocation of Shares. The bookbuild will take place on $1,000, including where $1,000 is not a multiple of the Final Price. 27 and 28 March 2014.40
Refunds and Scaling The Final Price will be determined by the Crown and may be If the Offer or any part of it is withdrawn, then the relevant within, above or below the Indicative Price Range of $1.35 to $1.65 Application amounts will be refunded without interest no later per Share. than five Business Days after the decision to withdraw the Offer is announced.
Summary of the Retail Offer
Who can apply How many Are you eligible for Shares in the Shares can you Will you be allocated all the Shares for Loyalty Retail Offer? apply for? that you apply for? Bonus Shares? How do you apply?
General Offer: The minimum Applications up to $1,000 will not be scaled. Apply online at: New Zealand Application Applications in excess of $1,000 will not receive less ü www.genesisenergyshares.govt.nz Applicants amount is than $1,000 worth of Shares. or by completing the Application $1,000. If the Offer is over-subscribed, your Application may Form included with this Investment be scaled back. Statement.
Broker Firm Offer: The minimum It will be a matter for the NZX Firm or selected Contact your NZX Firm or selected New Zealand Application trading bank to decide how they make allocations ü trading bank that notified you of your Applicants who amount is amongst their eligible retail clients and whether your allocation and they will provide you are offered a firm $1,000. Your Application will be scaled back. with Application instructions. allocation by an NZX broker will If the Crown exercises its right to scale back Broker Firm or a selected inform you Firm Offer allocations following the close of the trading bank of your firm General Offer, retail client Applications under allocation. the Broker Firm Offer will be scaled back at the Crown’s discretion. There is no minimum guaranteed allocation under the Broker Firm Offer. Accordingly, final individual allocations under the Broker Firm Offer may be lower than the minimum Application amount of $1,000.
40 These dates are subject to change as noted in Section 2 Offer at a Glance.
Genesis Energy Share Offer investment statement 41 Section SEVEN TERMS OF THE OFFER
Loyalty Bonus Shares participate in the Offer through the lwi Pool will receive a payment You may be entitled to receive Loyalty Bonus Shares from the from the Crown, in the form of Shares, on account of their potential Crown if you: settlement amount and will not be required to make a cash payment —— are a New Zealand Applicant who receives an allocation in the for their Shares. Participating lwi that apply for Shares in the Retail Offer (whether you apply under the General Offer or the Participating Iwi Offer will not be scaled and will receive a guaranteed Broker Firm Offer); and allocation of Shares. Any Shares allocated under the Participating Iwi —— hold your allocated Shares continuously in the same registered Offer will not form part of the Crown's shareholding of at least 51% of name until 12 months from the Allotment Date (subject to very Genesis Energy's Shares following the Offer. limited exceptions set out in Section 7.1 Details of the Offer in the Prospectus). Supplementary Disclosure Loyalty Bonus Shares will be fully paid ordinary shares in the and Withdrawal Right Company. The number of Loyalty Bonus Shares that you are entitled If any significant adverse developments occur prior to to receive will be calculated on the basis of one Loyalty Bonus Share the Allotment Date, the Crown and Genesis Energy may for every 15 Shares allocated to you under the Retail Offer and held advise investors of those developments by publishing continuously in the same registered name until 12 months from the advertisements in newspapers with additional information Allotment Date, up to a maximum of 2,000 Loyalty Bonus Shares. on the Offer websitewww.genesisenergyshares.govt.nz The number of Loyalty Bonus Shares you will be eligible to receive and available by calling 0800 90 30 90, pursuant to an will be calculated based on the lowest number of Shares held exemption granted by the Financial Markets Authority continuously by you between the Allotment Date and 12 months under the Securities Act. following that date. Fractional entitlements to Loyalty Bonus Shares The Final Price may be altered by the Crown due to the will be rounded down to the nearest whole number. The number of occurrence of a significant adverse development. If that Loyalty Bonus Shares you are entitled to receive will be adjusted as occurs, the revised Final Price will be set out in advertisements appropriate to take account of any share consolidation, share split published in newspapers. or bonus share issue. If the Crown and Genesis Energy advise that a significant The conditions which must be met in order for the Loyalty Bonus adverse development has occurred prior to the Allotment Shares to be allotted to you are set out in Section 7.1 Details of the Date, by publishing advertisements in newspapers, then an Offer in the Prospectus. Applicant may withdraw their Application if it is dated on or Applications under the Institutional Offer and the Participating Iwi before the date of publication of the advertisements and the Offer have no entitlement to Loyalty Bonus Shares. New Zealand Applicant’s notice of withdrawal is received by or on behalf of Applicants applying through Custodians will be entitled to Loyalty the Crown or Genesis Energy within seven days after the date Bonus Shares on the same basis as if they were applying directly in of the initial publication of the advertisements. the Offer, provided that the eligibility criteria are satisfied. Notice of withdrawal must be given: The value of any Loyalty Bonus Shares at the date on which they are —— by calling 0800 90 30 90; or transferred to you should reflect the market price of the Shares in —— by completing the withdrawal form that the Company at that date. will be made available on the Offer website www.genesisenergyshares.govt.nz. The Crown intends to allot Loyalty Bonus Shares within five Business Days of the date which is 12 months from the Allotment Withdrawals made by any other method may not be Date. If, for any reason, the Crown cannot legally deliver you your accepted by the Crown. Loyalty Bonus Shares, or it is unduly onerous for legality to be If an Applicant does not take any action to effect withdrawal determined, your Loyalty Bonus Shares will be issued to a nominee within the relevant time period, the Crown will be entitled to who will sell those Shares on your behalf and pay you the proceeds accept the Applicant’s Application. of the sale after any costs have been deducted. The Crown and Genesis Energy must refund any Applicant You will not have any entitlement to any dividends paid on Loyalty who has validly withdrawn their Application (without Bonus Shares prior to any Loyalty Bonus Shares being transferred interest) within five working days after the expiry of the to you. seven day withdrawal period described above. Institutional Offer The Institutional Offer is made to Institutional Investors in Allocations and Allotments New Zealand, Australia and certain other jurisdictions, who will The Crown will determine Share allocations, in consultation with its participate through the bookbuild. advisers and Genesis Energy.
Participating Iwi Offer If the General Offer is over-subscribed, your Application for Shares may be scaled. This means that the dollar amount of Shares you A pool of up to $94 million worth of Shares (the “Iwi Pool”) receive may be less than the dollar amount of Shares for which you representing approximately 6.3% of the Shares41 on issue has been apply, subject to your guaranteed minimum allocation. reserved by the Crown for allocation to iwi, with a Crown-recognised deed of mandate, that currently have unsettled historical claims The Crown will determine scaling of the General Offer, in consultation against the Crown under the Treaty of Waitangi. lwi that elect to with its advisers and Genesis Energy. Scaling may not be pro rata.
41 Calculated at the mid point of the Indicative Price Range.
42 section SEVEN TERMS OF THE OFFER The trustee of the Genesis Energy Executive LTI Plan will receive have been complied with. However, NZX accepts no responsibility an allocation priority in respect of any Shares for which it applies for any statement in this Investment Statement. The NZX Main on behalf of participating executives up to a maximum dollar Board is a registered market operated by NZX, which is a registered amount of $850,000 of Shares (representing approximately 0.06% exchange regulated under the Securities Markets Act 1988. The of the Shares on issue in the Company41). You can find out further Company’s NZX and, if listed, ASX stockcode is ‘GNE’. information about the Executive LTI Plan, and information about An application will be made to ASX for the Company to be admitted the Employee Share Ownership Plan which is proposed to be to the official list of the ASX and for quotation of the Shares on the introduced during FY2015, in Section 4.2 Board, Management and ASX after this Investment Statement and the Prospectus (which Corporate Governance of the Prospectus. includes the disclosure relevant to Australian Institutional Investors Allocations by NZX Firms and selected trading banks under the and to comply with requirements for a recognised offer under Broker Firm Offer to their New Zealand Applicant clients will be Chapter 8 of the Australian Corporations Act 2001 (Cth) and the determined by those NZX Firms and selected trading banks. It will Australian Corporations Regulations 2001 (Cth)) have been lodged be a matter for the NZX Firms and selected trading banks to ensure with the Australian Securities and Investment Commission. that New Zealand Applicant clients who have received an allocation ASX takes no responsibility for the contents of this Investment from them receive the relevant Shares. If the Crown exercises its Statement or for the merits of the investment to which this right to scale back Broker Firm Offer allocations following the close Investment Statement relates. The fact that ASX may admit the of the General Offer, Applications from New Zealand Applicant Company to the official list and quote the Shares on the ASX is not clients under the Broker Firm Offer will be scaled back at the to be taken as an indication of the merits, or as an endorsement Crown’s discretion. There is no minimum guaranteed allocation by ASX, of the Company or the Shares. The ASX is not a registered under the Broker Firm Offer. Accordingly, final individual allocations market under the Securities Markets Act 1988. under the Broker Firm Offer may be lower than the minimum Application amount of $1,000. What you need to do to sell your Shares No brokerage, commission or stamp duty is payable by Applicants If you wish to sell your Shares on the NZX Main Board after under the Offer. confirming your allocation you must contact an NZX Firm Successful Applicants in the General Offer who and have a CSN and an Authorisation Code (“FIN”). Opening applied online will be able to confirm their allocation at a new broker account can take a number of days depending www.genesisenergyshares.govt.nz from 17 April 2014 using the on the NZX Firm’s new client procedures. If you do not have a reference number they receive when their Application is made. CSN, you will: Successful Applicants in the General Offer who did not apply online —— be assigned one when you set up an account with an NZX will be able to confirm their allocations by calling0800 90 30 90 Firm; or from 17 April 2014. Broker Firm Applicants should contact their NZX —— receive one from the Registrar when you receive your Firm or trading bank from whom they received their allocation to allotment notice for the Offer (which is expected to be find out if their Application was successful. sent on the Allotment Date, after trading has commenced). Cancellation of Sale of Shares If you applied online you can also obtain your CSN at If you apply for Shares and misrepresent your status as a www.genesisenergyshares.govt.nz from 17 April 2014 or, if New Zealand Applicant, the Crown may cancel the sale of Shares to you did not apply online, by calling 0800 90 30 90 from the you and in such case: same date. —— the Company must sell the Shares you hold, up to the number of If you do not have an Authorisation Code (“FIN”), it is expected Shares sold to you under this Offer, irrespective of whether your that you will be sent one as a separate communication by the Shares were acquired under this Offer (unless you had previously Registrar on 16 April 2014 . If you have a broker and have not sold, transferred or disposed of all of your Shares to a person received an Authorisation Code (“FIN”) by the date you want to who was not associated with you); and trade your Shares, your broker can obtain one, but may pass the —— you will receive the lesser of: $20 cost for doing so on to you. • the sale price for your Shares less the costs incurred by the Crown and Genesis Energy; and • the aggregate price paid for your Shares less those costs, None of the Crown, Genesis Energy, the Joint Lead Managers, the Registrar or any of their respective directors, officers or employees with any excess amount being payable to the Crown. accepts any liability or responsibility should any person attempt to If you have misrepresented your entitlement to Shares and have sell or otherwise deal with the Shares before a statement confirming sold, transferred or otherwise disposed of Shares to an associated allotment of Shares is received. person, then the power of sale will extend to Shares held by that associated person, up to the number of Shares you transferred, sold Failure to Achieve Listing or otherwise disposed of to the associated person. If admission to list on the NZX Main Board is denied or the Offer does not proceed for any other reason, all Application amounts Listing and Quotation of Shares will be refunded in full without interest no later than five Business The Company has applied to NZX to list Genesis Energy, and to Days after announcement of the decision not to proceed. Failure to quote the Shares, on the NZX Main Board. All of NZX’s requirements achieve admission to list on the ASX will not, of itself, prevent the relating to the application for listing and quotation that can be Offer from proceeding. complied with on or before the date of this Investment Statement
Genesis Energy Share Offer investment statement 43 section EIGHT About the shares
section NINE how do I Apply?
glossary, Appendix & Directory
44 About the shares
Each Share confers an equal right to share in dividends and other reliable and attractive dividend even in periods of business cycle distributions authorised by the board of Genesis Energy, and to downturn. It is intended that, year on year, the dollar amount of cast a vote at meetings of Shareholders, in accordance with the ordinary dividend payments will at least be maintained in real terms. Constitution. Genesis Energy intends to pay dividends semi-annually, typically After completion of the Offer, the Crown, acting by and through in April and October of each year. the Shareholding Ministers, will continue to be Genesis Energy’s majority shareholder with a holding of at least 51% of the Shares Shareholding Restrictions in the Company. For further information in relation to the Under the Public Finance Act the Crown must hold at least 51% consequences of this, see Section 4 About Genesis Energy under of the Shares on issue and no person (other than the Crown) may the heading “Relationship between Genesis Energy and the Crown” have a Relevant Interest in more than 10% of the Shares on issue and Section 4.3 Relationship between Genesis Energy and the Crown (“10% Limit”). of the Prospectus. Genesis Energy must not issue, acquire or redeem any Shares if Once the Shares are trading, further information about Genesis such issue, acquisition or redemption would result in the Crown Energy will be able to be obtained at www.nzx.com. falling below this 51% holding or a person (other than the Crown) exceeding the 10% Limit. What Returns Will I Get? These restrictions would also apply to any other classes of shares Your returns on Shares may be: or securities which confer voting rights should Genesis Energy —— dividends paid and other distributions which may be made issue them. in respect of your Shares; and —— any gains you make if you sell or dispose of your Shares for A holder of Shares who breaches the 10% Limit or knows or believes a net price that is greater than the price you paid for them that a person may have breached the 10% Limit must notify Genesis (although the market price of your Shares may also decline, Energy of the breach or potential breach. making them worth less than you paid for them). If a Relevant Interest is held in any Shares in breach of the 10% Limit No amount of returns is promised in respect of the Shares. The and this was inadvertent then, for so long as that breach continues: key factors that will determine your returns (if any) are the market —— no votes may be cast in respect of any of the Shares in which a price for Shares and the board’s decisions in relation to dividends Relevant Interest is held in excess of the 10% Limit; and or other distributions. If you sell your Shares, you may be required —— the registered holder(s) will not be entitled to receive any to pay brokerage or other sale expenses. Tax will also affect your dividend or other distribution authorised by the board in respect returns from the Shares. You should seek your own tax advice in of the Shares in which a Relevant Interest is held in excess of the relation to your Shares. 10% Limit. Genesis Energy is legally liable to pay you any dividends or other However, if the board determines that a breach of the 10% Limit was distributions declared on your Shares. not inadvertent, or that it does not have sufficient information to determine that the breach was not inadvertent, then in that case the If you sell any of your Shares, the purchaser of those Shares will be restrictions on voting and entitlement to receive any dividends or legally liable to pay you the sale price. other distributions described in the preceding paragraphs will apply You may cash in your investment by selling your Shares. Any sale in respect of all of the Shares held by the relevant Shareholder. of Shares must be made in accordance with the requirements of the The board may refuse to register a transfer of Shares if it knows Constitution, the NZX Listing Rules and ASX Listing Rules and any or believes that the transfer will result in a breach of the 10% Limit applicable laws. or where the transferee has failed to lodge a statutory declaration Dividend Policy requested from it by the board. Dividends and other distributions with respect to the Shares are Trustee corporations and nominee companies (that hold securities only made at the discretion of the board of Genesis Energy. The on behalf of a large number of separate underlying beneficial payment of dividends is not guaranteed and Genesis Energy’s holders) are exempt from the 10% Limit provided they satisfy dividend policy may change. The board’s decisions in relation to certain conditions set out in the Public Finance Act. the level of reserves and retentions may affect any dividends or The Constitution contains provisions to give effect to the above distributions you receive from the Shares. restrictions, and NZX and ASX have granted certain waivers from In determining dividends payable to Shareholders, Genesis their respective listing rules to permit the Constitution to contain Energy will comply with the solvency test specified in the these provisions. As a condition, Genesis Energy will bear a ‘non- Companies Act 1993. standard’ designation on the NZX Main Board.
Under ordinary business circumstances, the dividend to be declared Can My Investment be Altered? is determined by reference to Genesis Energy’s: Genesis Energy may only amend its Constitution (which sets out —— working capital requirements; the rights attached to Shares) with approval by a special resolution —— medium term fixed asset expenditure programme; of Shareholders. Genesis Energy cannot take any action that affects —— investment in new business opportunities; and the rights of any interest group of Shareholders without approval by —— risk profile, taking into account the sustainable financial structure a special resolution of that affected interest group. for the business and considering predictions of short and medium term economic and market conditions. A special resolution must be approved by at least 75% of the votes of those Shareholders entitled to vote and who actually vote on that Subject to the above circumstances that from year to year may resolution. Under certain circumstances, if your rights are affected affect the quantum of dividend paid, it is Genesis Energy’s intention by an action approved by a special resolution, you may require to pay a dividend that provides Shareholders with a consistent, Genesis Energy to purchase your Shares. Genesis Energy Share Offer investment statement 45 Section NINE HOW DO I APPLY?
HOW DO I APPLY?
Apply Online at Apply on the Paper Application www.genesisenergyshares.govt.nz Form in this Investment Statement Complete the Application Form online following the on screen Complete the blank Application Form at the back of this instructions. You will be required to download a copy of this Investment Statement in accordance with the instructions on Investment Statement as part of the online Application process. the Application Form. You must confirm that the download was completed before You can either complete the Application Form to authorise submitting your online Application. a one-time direct debit from your bank account or attach a You can either submit your Application payment online by cheque to your Application Form as payment for your Shares. authorising a one-time direct debit from your bank account, You should complete the Application Form in accordance with or post a remittance receipt and cheque to the Registrar using the instructions on the Application Form. the freepost number provided in time to be received by 5.00pm Your Application Form should be posted to the Registrar at on 11 April 2014. See below under the heading “Application Private Bag 92119, Auckland Mail Centre, Auckland 1142, using Payment”. the freepost number provided (119873) in time to be received by 5.00pm on 11 April 2014. Alternatively, Applications can be lodged with any NZX Firm, the Joint Lead Managers or any other channel approved by NZX so as to be received in time to enable forwarding to the Registrar by 5.00pm on 11 April 2014.
Application Instructions Applying through a Broker, Custodian or Nominee Account Broker Firm Offer Applications To apply using a broker, Custodian or nominee account, contact To apply in the Broker Firm Offer, contact your broker and they your broker and they will provide you with Application instructions. will provide you with Application instructions. Broker Firm Offer Applications must be made directly through your broker. Applications If you are applying using a Custodian, you must provide your made through the www.genesisenergyshares.govt.nz website, or Custodian with all the information necessary to establish the validity made on paper forms submitted directly to the Registrar, will be of your Application as a New Zealand Applicant as if you were processed as General Offer Applications and will be in addition to applying directly for Shares in the Offer. any Application made in the Broker Firm Offer. If your Custodian provides this information with its Application There is no restriction on Applicants applying in both the Broker in accordance with the instructions it has been given, you will be Firm Offer and the General Offer, although the Crown reserves the entitled to the same incentives for New Zealand Applicants and right to treat duplicate Applications on a differential basis for the your Application will be scaled (in the event of over-subscriptions) purposes of scaling Applications in the General Offer. on the same basis as if you had applied directly for Shares in the Offer.
46 section NINE HOW DO I APPLY? Participating Iwi Offer Applications Submitting Your Application Participating Iwi will be provided with their Application instructions You will not be able to reverse or change your Application after by the Office of Treaty Settlements. Participating Iwi that apply for it has been submitted, except in the case of a supplementary Shares in the Participating Iwi Offer will not be required to make a disclosure document being produced. By submitting an Application cash payment for the Shares for which they apply. you agree to purchase and subscribe for the dollar amount of Shares you specify in your Application Form on the terms and Treatment of Application conditions set out in this Investment Statement (including the If your Application is incomplete or otherwise invalid, for Application Form) and the Prospectus. example if the Application Form is not completed correctly or the accompanying payment is for the wrong amount, the Crown Privacy Policy may still treat it as valid. The Crown reserves the right to refuse If you apply for Shares, you will be asked to provide personal any Application or to accept an Application in part only, without information to The Treasury, Genesis Energy, the Registrar and their providing a reason. respective agents who will collect and hold the personal information provided by you in connection with your Application. The decision of the Crown as to whether to treat your Application as valid, and any changes made by the Crown to complete your Your personal information will be used: (a) for considering, Application, will be final. The decision on the number of Shares to processing and corresponding with you about your Application; be allocated to you will also be final. You will not be allocated more (b) in connection with your holding of Shares, including sending Shares than can be purchased with the payment you have made. you information concerning Genesis Energy, your Shares and If your Application is not accepted, or is accepted in part, you will other matters Genesis Energy considers may be of interest to you receive a refund of the balance payment without interest within five by virtue of your holding of Shares; (c) for conducting an audit Business Days after the Allotment Date. Refunds will be paid in the or review of the activities contemplated in (a) or (b); and (d) for manner you elect any future dividend payments to be paid. sending you information about special offers for Shareholders in relation to Genesis Energy’s products and services. Application Payment Applications must be accompanied by payment in full for the dollar To do these things, The Treasury, Genesis Energy or the Registrar amount of Shares applied for. Payment may be made to the Crown may disclose your personal information to: (a) each other; (b) their by direct debit or cheque and will be held by the Crown in trust until respective related companies; and (c) agents, contractors or third Shares are allotted to successful Applicants or Application monies party service providers to whom they outsource services such as are refunded. mailing and registry functions, including the Joint Lead Managers, Solution Dynamics Limited and Reach Investor Solutions Pty Ltd. Option 1: One-time Direct Debit However, all of these parties will be bound by the same privacy If you choose to make a one-time payment out of your bank policies as The Treasury, Genesis Energy and the Registrar. account, the direct debit will be processed on the first Business Day after your Application Form is received by the Registrar or, In addition, if you elect to pay by one-time direct debit, the if received on the day the Offer closes, the same Business Day. Registrar will communicate with your nominated bank (including providing your personal information) for the purposes of processing One-time direct debits will only be processed from New Zealand your payment. If you identify in your Application Form that you registered banks. You must ensure that: have a relationship with a broker, financial adviser or private banker —— the bank account details supplied are correct; (including by submitting an Application Form that has a broker, —— there are sufficient funds in the specified bank account; financial adviser or private banker’s stamp or code in the top right- —— you have the authority to operate the account solely/jointly; and hand corner), The Treasury, Genesis Energy or the Registrar may —— the bank account you nominated is one which will allow the provide the details of your Application to your nominated broker, one-time direct debit to be made. For example, certain savings financial adviser or private banker. accounts may not allow money to be withdrawn in this manner. If you are uncertain you should contact your bank. Failure to provide the required personal information may mean that your Application Form is not able to be processed efficiently, if at all. If the direct debit from your bank account is unsuccessful, your Application will be rejected. The terms and conditions for one-time Where The Treasury, Genesis Energy and the Registrar hold direct debit can be obtained by calling 0800 90 30 90 during the personal information about you in such a way that it can be readily Offer period. retrieved, you have a right to obtain from The Treasury, Genesis Energy and the Registrar confirmation of whether or not they hold Option 2: Cheque such personal information, and to access and seek correction of If you choose to pay by cheque your cheque should be made that personal information under the Privacy Act 1993 by contacting payable to “Genesis Energy Offer”, be crossed “Not Transferable” the privacy officers of The Treasury, Genesis Energy and the and not be post dated. Registrar at their respective addresses shown in the Directory. Your cheque will be banked on the Business Day it is received. You can also access your information on the Registrar’s website: If your cheque is post dated or dishonoured, your Application may www.investorcentre.com/nz (you will be required to enter your CSN be rejected. and Authorisation Code (“FIN”)).
Questions? If you have questions about how to apply under the Offer, you can call0800 90 30 90 during the Offer period between 8.00am to 8.00pm (Monday to Friday) and 9.00am to 5.00pm (weekends) or visit www.genesisenergyshares.govt.nz.
Genesis Energy Share Offer investment statement 47 GLOSSARY
Constitution DPS GLOSSARY The constitution of the Company, as Dividend per Share declared shown in cents amended from time to time per share Allotment Date Contact Energy EBITDAF The date on which Shares are allotted to Contact Energy Limited Earnings before net finance expense, successful Applicants, which is expected to income tax, depreciation, depletion, be 16 April 2014, unless varied by the Crown Crown amortisation, impairment, revaluations Applicant Her Majesty the Queen in Right of (when they occur), changes in fair value of New Zealand Any person named as an applicant on an financial instruments and other gains and losses Application Form CSN Application Common Shareholder Number Executive LTI Plan The long-term incentive share plans offered An application to subscribe for Shares Custodian offered pursuant to this Investment to senior executives of the Company, as An Applicant for Shares that satisfies the Statement and the Prospectus made on the described in Section 4.2 Board, Management Registrar that it: Application Form and accompanied by the and Corporate Governance of the Prospectus —— is a trustee corporation or a nominee application amount company; Final Price Application Form —— will hold Shares by reason only of acting The price per Share at which the Shares will for another person in the ordinary course An application form attached to, or be allotted, expected to be determined on of business of that trustee corporation or accompanying, this Investment Statement or about 28 March 2014 nominee company; ASX —— holds a range of other securities which FPVV ASX Limited, or the financial market operated are quoted on a market operated by NZX Fixed price variable volume by ASX Limited, as the context requires, also on the same basis for defined beneficial known as the Australian Securities Exchange owners; and Free Cash Flow —— provides regular reporting and corporate EBITDAF less finance expense less income ASX Listing Rules actions services to the underlying tax expense less stay-in business capital The official listing rules of ASX beneficial owners; and expenditure.42 Free Cash Flow is presented • is owned by or affiliated to an NZX only to enable potential investors to Base-load Firm, or routinely and in the ordinary consider Genesis Energy’s prospective The component of the electricity system course of business provides these dividend declared pay-out ratio. The services to NZX Firms or clients of NZX load which is continuously present over a dividends declared as a ratio of Free Firms; or stated period. A Base-load power station Cash Flow highlights how much of Free serves mainly to meet expected Base-load, • has a demonstrable history of applying Cash Flow has been, or is expected to be, usually producing electricity at a constant for shares in public offers on behalf of converted into dividends rate and running continuously underlying beneficial owners FY bbl Customer Connection Financial year ended, or ending, 30 June Barrel In respect of electricity, an installation control point being an active point of Gas Industry Company Broker Firm Offer connection on a local network or an Gas Industry Company Limited The portion of the Offer that is open to embedded network that the distributor New Zealand Applicant clients of NZX nominates as the point at which a retailer is General Offer deemed to supply electricity to a consumer; Firms and selected trading banks, who have The portion of the Offer that is open to any in respect of natural gas, an installation received an allocation from their NZX Firm New Zealand Applicant or selected trading bank control point being the point at which a consumer installation is deemed to have Genesis Energy Business Day gas supplied The Company or the Group, as the A day on which the NZX Main Board is open context requires for trading Derivative A financial instrument, the price of which Group Capital Bonds is derived from the value of one or more Genesis Energy Limited and each of The unsecured debt securities issued by underlying securities, equity indices, debt its subsidiaries the Company pursuant to an investment instruments, commodities, other derivative statement and a prospectus dated on or instruments or any agreed pricing index GWAP about 7 April 2011 or arrangement. It can be either a private The generation weighted average price agreement negotiated between two parties calculated as the average price received for Company or a standardised agreement traded on electricity generated expressed in $/MWh Genesis Energy Limited an exchange GWh Gigawatt hour. One gigawatt hour is equal to 1,000 MWh or 1,000,000 kWh (being 42 “Stay-in business capital expenditure” relates to on-going asset management and life-cycle maintenance and reinvestment programme expenditure and includes capital expenditure on maintaining options for future kilowatt hours) development but excludes oil and gas rehabilitation and Tekapo canal remediation project capital expenditure.
48 GLOSSARY H1 Kupe oil and gas field or Kupe or permanent residents; or When preceding a year refers to half year The oil and gas interest in Petroleum • in the case of any other legal entity, financial results for the first six months of Mining Lease (PML) 38146, known as the it is incorporated or established that financial year Kupe oil and gas field located in Taranaki, in New Zealand and the majority New Zealand of its ultimate beneficial owners, Huntly Power Station or Huntly beneficiaries or members consists of Genesis Energy’s power station located Loyalty Bonus Shares persons who are New Zealand citizens in Huntly Fully paid ordinary shares in the Company or permanent residents to be transferred by the Crown to successful Hydro-firming Applicants under the Retail Offer subject NZ GAAP or GAAP The operation of Thermal Generation units to the terms and conditions set out in this New Zealand Generally Accepted so as to allow water to be stored for use Investment Statement and the Prospectus Accounting Practice during times of more optimal electricity including as to eligibility generation or when water is not available NZ IFRS LPG New Zealand equivalents to International IFRS Liquefied petroleum gas Financial Reporting Standards International Financial Reporting Standards Meridian NZX Indicative Price Range Meridian Energy Limited NZX Limited, also known as the $1.35 to $1.65 per Share New Zealand Stock Exchange Mighty River Power Institutional Investor NZX Firm Mighty River Power Limited An investor outside the United States to An entity designated as an NZX Firm under whom offers or invitations in respect of MW the Participant Rules of NZX securities can be made without the need A megawatt (MW) is a unit of power and NZX Listing Rules for a lodged prospectus (or other formality, equal to 1,000,000 watts (W) or 1,000 other than a formality which Genesis Energy kilowatts (kW) The listing rules applying to the NZX Main and the Crown are willing to comply with), Board as amended from time to time including in New Zealand persons to whom MWh NZX Main Board offers or invitations can be made without the A megawatt hour (MWh) is the amount of need for a registered prospectus under the electricity equivalent to a steady power of The main board equity security market, Securities Act one MW running for one hour; a megawatt operated by NZX hour is the metering standard unit for the Offer Institutional Offer wholesale market The invitation to Institutional Investors as The offer of Shares pursuant to this described in the Prospectus Net Debt Investment Statement and the Prospectus The value of current and non-current Investment Statement Participating Iwi borrowings less cash and cash equivalents This document Iwi, with a Crown-recognised deed of Net Profit mandate that currently have unsettled IRD historical claims against the Crown under Net profit for the period after tax New Zealand Inland Revenue Department the Treaty of Waitangi and that elect New Zealand Applicant to participate in the Offer and receive iwi An Applicant for Shares who provides the a payment from the Crown, in the form Māori term for a set of people bound following information with their Application of Shares, on account of their potential together often by descent from common Form: settlement amount ancestors or waka (canoe) that migrated to —— a valid New Zealand IRD number; New Zealand. Participating Iwi Offer —— a valid New Zealand bank account The Offer of Shares to Participating lwi Modern meaning: tribe or tribes number; —— a New Zealand address; and Peak-load or Peaking Joint Lead Managers —— a declaration that: Peak-load refers to the component of the First NZ Capital Securities Limited and • in the case of an individual, the electricity system load caused by peaks or Credit Suisse (Australia) Limited and UBS individual is a New Zealand citizen or spikes due to demand New Zealand Limited permanent resident; or • in the case of a New Zealand Peak-load or Peaking power stations meet kbbl incorporated company, it is peaks or spikes in electricity demand Kilobarrel incorporated in New Zealand and (known as peak demand). Peak-load power the majority of its ultimate beneficial stations need to be responsive to quickly kT owners consists of persons who are achieve the levels of electricity generation Kilotonne New Zealand citizens or permanent required to meet peak demand or take residents; or advantage of high wholesale electricity Kupe Joint Venture • in the case of a trust, it is established prices. Some power stations may be The joint venture between the owners of in New Zealand and the majority of operating at certain times as Peak-load the Kupe oil and gas field relating to the its ultimate beneficiaries consists of power stations and at other times serve as ownership and operation of the field persons who are New Zealand citizens Base-load or Hydro-firming
Genesis Energy Share Offer investment statement 49 GLOSSARY
PFI Q Securities Act Prospective Financial Information A quarter of a financial year Securities Act 1978
PJ Rankine Units Securities Regulations A petajoule is a unit of energy, which is The two 250 MW gas and coal fired units Securities Regulations 2009 commonly used to measure gas, LPG and oil in service at Huntly and the 250 MW unit currently in storage at Huntly, being units 1, Share Possible Reserves 2 and 4 A fully paid ordinary share in Those additional reserves which analysis of Genesis Energy geoscience and engineering data indicate Registrar are less likely to be recoverable than Computershare Investor Services Limited Shareholder Probable Reserves A holder of one or more Shares in Relevant Interest the Company Probable Reserves A relevant interest has the meaning given Those additional reserves which analysis of to it by sections 5 to 6 of the Securities Shareholding Ministers geoscience and engineering data indicate Markets Act 1988. In broad terms, a person The Minister of Finance and Minister for are less likely to be recovered than Proved has a “relevant interest” in a Share if the State Owned Enterprises Reserves but more certain to be recovered person (a) is the registered holder or than Possible Reserves beneficial owner of the Share; or (b) has the Tekapo Power Scheme power to exercise, or control the exercise The Tekapo power scheme located at the Prospective Period of, a right to vote attached to the Share or head of the Waitaki Valley in the Mackenzie The financial years ending 30 June 2014 and has the power to acquire or dispose of, or to District of the South Island 30 June 2015 control the acquisition or disposition of, that Share. A person may also have a relevant Thermal Generation Prospectus interest in a Share in which another person Electricity generated using gas, coal The prospectus in respect of the Offer has a relevant interest depending on the or diesel nature of the relationship between them Proved Reserves TOU Those quantities of petroleum, which by Renewable Generation Time of use that is, the prices a customer analysis of geoscience and engineering Electricity generated using renewable pays depends on the time they consume data, can be estimated with reasonable resources such as water, geothermal and electricity or gas certainty to be commercially recoverable, wind from a given date forward, from known Transpower reservoirs and under defined economic Retail Offer Transpower New Zealand Limited conditions, operating methods and The General Offer and the Broker Firm Offer Trustpower Government relations rohe Trustpower Limited Public Finance Act The territory or boundaries of tribal groups Unit 5 Public Finance Act 1989 The 403 MW combined cycle gas turbine unit at Huntly
Additional Definitions for the Key Offer Statistics and Key Investment Metrics
EV/EBITDAF multiple Implied gross dividend yield Indicative market capitalisation EV divided by EBITDAF for the respective DPS for the respective prospective The number of Shares on issue following forecast financial year. This is a valuation financial year, grossed up for imputation the Offer multiplied by the Indicative metric that enables comparison with industry credits expected to be attached to the Price Range. competitors and stock market peers. dividend (calculated at a tax rate of 28%),43 divided by the Indicative Price Range. This Price/earnings ratio Implied cash dividend yield metric is used to approximate the return Indicative market capitalisation divided DPS for the respective prospective to the average investor on a pre-tax basis. by Net Profit for the respective forecast financial year divided by the Indicative financial year. This is a valuation metric Price Range. Based on the cash cost to Indicative enterprise value (EV) that enables comparison with industry the Company, not necessarily the cash The indicative market capitalisation plus competitors and stock market peers. received by investors which will depend prospective Net Debt as at 30 June 2014. on individual investor tax rates and the assumption that the investor holds Shares over the full year.
43 Refer to assumption 36 under the heading “Specific assumptions in respect of the prospective financial information” in theAppendix - Prospective Financial Information.
50 GLOSSARY APPENDIX
Prospective Financial Information
This appendix contains: The PFI includes items considered non-GAAP financial information, —— the basis of preparation for the consolidated PFI for Genesis including one profit measure other than Net Profit, being EBITDAF Energy, including the significant accounting policies applied; as has been used in historical financial statements and explained —— a description of the board’s best estimate of general and in Section 5 Overview of Financial Information. Other non-GAAP specific assumptions that underpin the PFI contained in this financial information used includes Free Cash Flow and Net Debt. Investment Statement; Where non-GAAP financial information is reported there is a —— the consolidated PFI for Genesis Energy, as required by clause reference to further information to help you interpret those terms. 11(1)(c) of Schedule 1 of the Securities Regulations to be included The directors are responsible for and have authorised for in the Prospectus, which includes prospective consolidated issue the consolidated PFI on 13 March 2014 for use in this Investment comprehensive income statement, balance sheet, statement Statement. of changes in equity and cash flow statement; and —— an analysis of the sensitivity of PFI to changes in specific Accounting Policies key assumptions. The significant accounting policies applied to the preparation of Basis of Preparation the consolidated PFI are set out in Section 6.4.4 Audited Interim Financial Statements for the Six Months Ended 31 December 2013 The consolidated PFI, for the year ending 30 June 2014 (“FY2014”) and in Section 6.4.5 Audited Financial Statements for the Year Ended and for the year ending 30 June 2015 (“FY2015”) has been prepared 30 June 2013 of the Prospectus. One new accounting policy was in accordance with the requirements of FRS-42 Prospective Financial adopted in H1 2014 relating to share based payments along with the Statements, as required by the Securities Regulations, specifically application of new and revised NZ IFRS (see Section 6.4.4 Audited for the purpose of the Offer and may not be suitable for any Interim Financial Statements for the Six Months Ended 31 December other purpose. 2013 of the Prospectus). The consolidated PFI, including the assumptions underlying it, has Currently there are no anticipated changes to accounting standards been prepared by management and approved by the board. They are under NZ GAAP that are expected to materially affect Genesis based on the board’s assessment of events and conditions existing Energy during the Prospective Period. However, any further at the date of this Investment Statement and the accounting policies changes to NZ GAAP could necessitate changes in the accounting and best estimate assumptions set out under the heading “General policies currently adopted and any new or amended accounting and Specific Assumptions” below. The Crown has not been involved standards, or interpretation, may affect the actual financial results in the preparation of the consolidated PFI. or financial position. PFI by its nature involves risks and uncertainties, many of which are beyond the control of Genesis Energy. The board believes that the General and Specific Assumptions consolidated PFI has been prepared with due care and attention, and A description of the board’s best estimate general and specific consider the best estimate assumptions, when taken as a whole, to assumptions upon which the consolidated PFI is based are be reasonable at the time of preparing this Investment Statement. summarised below, and should be read in conjunction with the Actual results are likely to vary from the information presented as information set out in the section What are my Risks? in this anticipated events and results may not occur as expected, and the Investment Statement and in the Prospectus. variations may be material. Accordingly, neither the Directors nor any other person can provide any assurance that the consolidated PFI will General Assumptions in Respect of the Prospective be achieved and investors are cautioned not to place undue reliance Financial Information on the PFI. 1. Competitive, legislative and regulatory environment There will be no material change in Genesis Energy’s competitive, The consolidated PFI includes historical trading results for the legislative or regulatory environment, specifically: six month period to 31 December 2013, based on audited interim —— no change over access to land and water resources from financial statements (as set out inSection 6.4.4 Audited Interim Treaty of Waitangi or other claims; and Financial Statements for the Six Months Ended 31 December 2013 —— no material regulatory changes or electricity market of the Prospectus). reform including no changes to retail or wholesale electricity There is no present intention to update the consolidated pricing regulation. PFI or to publish PFI in the future, other than as required by 2. Economic environment accounting standards. Genesis Energy will present a comparison There will be no material change in the general economic of the consolidated PFI with actual financial results when reported environment or conditions in which Genesis Energy operates in accordance with NZ GAAP and Regulation 44 of the Securities (including the level of activity in the industrial sector) or population Regulations. growth which would materially affect national electricity demand. The PFI is presented in New Zealand dollars and is rounded to the 3. Key customers and suppliers nearest million (to one decimal place), which may result in some There will be no material change in existing contractual, business discrepancies between the sum of components and totals within or operational relationships with Genesis Energy’s key customers tables, and also in certain percentage calculations. or suppliers throughout the Prospective Period, other than the Meridian swaption which runs till October 2014, (discussed in
Genesis Energy Share Offer investment statement 51 APPENDIX
Section 4.1 Business Description of the Prospectus). Relationships Volumes and mix with other key customers or suppliers, should they cease, will be The retail customer electricity sales volumes and mix are subject to replaced by arrangements with other parties on similar levels of the following underlying assumptions: activity and contractual terms. —— retail electricity sales volumes will increase by 2.7% in FY2014 driven by increased TOU volumes due to C&I contract wins in late 4. Joint ventures FY2013 which are accumulating in FY2014, outweighing reduced Existing contractual, business and operational relationships and volumes to retail customers; Genesis Energy’s participation in the Kupe Joint Venture will —— retail electricity sales volumes increase by 3.6% in FY2015, with the continue throughout the Prospective Period. full year impact of contracted TOU volumes and with growth in 5. New Zealand taxation volumes to retail customers back towards levels achieved in FY2013; There will be no material change to the New Zealand corporate tax —— new retail electricity customers are forecast to be offset by rate of 28%. There will be no material changes to corporate tax laws customers switching to other electricity retailers with a net 0.3% that would affect Genesis Energy. decline in electricity customers in FY2014 and no change in FY2015; and 6. Accounting standards —— the average volume per customer is based on the average of the Accounting standards and interpretations will remain consistent last three financial years usage by type of retail customer and throughout the Prospective Period. The prospective financial by location (North or South Island), adjusted for above average information assumes that there will be no material change in year weather conditions, including air temperature, which NZ GAAP during the Prospective Period. affects customer demand and the customer mix profile as at 7. Inflation 31 December 2013.
Consumers Price Index Inflation to be at a constant rate of 2.2% See Sensitivity Analysis later in this Appendix for sensitivity analysis across the Prospective Period. Fuel cost inflation, based on the on Electricity Customer Sales Volumes. Producers Price Index, will be 2.3% in FY2014 and 2.8% in FY2015. Electricity sales to wholesale customers represent derivative volumes Specific Assumptions in Respect of the Prospective sold, normally via financial contracts such as CFDs and Options, but Financial Information excludes futures on the New Zealand Electricity Futures and Options 8. Customer electricity and gas revenue Market operated by the ASX. These volumes fluctuate as a result of Customer electricity and gas revenue represents: both the management of the integrated portfolio and the diverse —— sales of electricity, natural gas and LPG to retail customers (that nature of Genesis Energy’s generation portfolio. is individual residential households, small to medium enterprises The volumes sold to wholesale customers mainly depends on (“SME”) and some large commercial organisations), also referred strategic positions taken and the opportunities available to to as fixed price variable volume (“FPVV”) customers, under the maximise the value of Genesis Energy’s excess Thermal Generation Genesis Energy and Energy Online brands; and capacity (normally related to periods of higher, or potentially higher, —— Time of use (“TOU”) volumes sold to commercial and industrial wholesale electricity prices or demand peaks). The net outcome for (“C&I”) customers (some of whom also purchase on a fixed price FY2013 was that Genesis Energy ran a “short” position (ie retail and variable volume basis). wholesale sales higher than generation volumes) taking advantage Customer electricity and gas revenue is dependent on the volumes, of relatively low wholesale electricity prices to purchase electricity mix and prices at which Genesis Energy sells electricity and/or gas for its retail customers. This position is expected to continue in to its customers. FY2014 with a lesser “short” position in FY2015 as the result of some of the current derivatives ending, in particular Meridian For electricity and gas price and volume assumptions, overarching swaptions (see assumption 24), and this additional capacity not assumptions are: expecting to be sold at this point in time. Value is improved when —— no material change in competitive behaviour in either the Genesis Energy can sell electricity to the wholesale market during wholesale or the retail electricity and gas markets; periods of high wholesale electricity prices and purchase wholesale —— any new entrants or gas discoveries will not materially change electricity at lower prices to supply its retail customers. the competitive environment; and —— no material change in the national wholesale electricity market or the way Genesis Energy buys electricity from the market for its customers.
52 APPENDIX PROSPECTIVE FINANCIAL INFORMATION Customer Data
FY2012 FY2013 FY2014 FY2015
Historical Historical Prospective % change Prospective % change
Electricity customers (#)44, 45 529,342 543,774 541,920 (0.3)% 541,920 0.0%
Electricity sales – FPVV (GWh) 4,909 4,902 4,754 (3.0)% 4,873 2.5%
Electricity sales – TOU (GWh) 520 452 743 64.4% 821 10.5%
Electricity sales – Retail (GWh) 5,429 5,354 5,497 2.7% 5,694 3.6%
Electricity sales – Wholesale (GWh) 3,020 2,705 2,036 (24.7)% 1,428 (29.9)%
Gas Customers (#)44, 45 111,578 115,003 118,949 3.5% 120,140 1.0%
Retail Gas Sales (PJ) 5.4 5.0 6.3 26.0% 6.9 9.5%
Total Customers (excluding LPG)44, 45 640,920 658,777 660,869 0.3% 662,061 0.2%
LPG Customers (#) 7.610 9,708 12,708 30.9% 13,848 9.0%
LPG Sales (kT) 2.0 2.4 3.0 25.0% 3.6 20.0%
Total Customers (#)44, 45 648,530 668,485 673,577 0.8% 675,908 0.3%
Genesis Energy experienced an average customer switching rate46 —— prompt-payment discounts, and current level of discount uptake, of its retail electricity customers of approximately 18.4% (for the continues as per recent trading; and year to 31 December 2013) based on average switching rates. Whilst —— TOU pricing changes in line with contracted prices. the average customer switching rate is not an explicit underlying See Sensitivity Analysis later in this Appendix for sensitivity analysis assumption it is a key performance indicator. Recent national on the energy and service costs component of the electricity retail market trends have been trending towards higher switching rates price increases. and this trend has been considered in the development of electricity customers number assumptions outlined above. The customer gas sales price comprises a fixed daily rate and a variable price based on volume used. The average selling price in Gas customers are forecast to increase in FY2014 and FY2015 with the Prospective Period reflects current pricing and planned price growth in the TOU market and increases in the number of dual fuel changes, along with promotional pricing programmes. customers that receive a discount when they purchase both electricity and gas from Genesis Energy. These higher customer numbers drive 9. Wholesale electricity prices higher volumes and therefore revenue, with average usage per Consistent with other industry participants, Genesis Energy utilises customer forecast to remain similar to usage witnessed in FY2013. a demand and supply simulation model of the New Zealand electricity system to estimate market wholesale electricity prices. Prices The model reflects underlying assumptions for supply and demand. Average total retail electricity prices received are a function of prices for the energy and service costs component (which includes Specific assumptions include: the price to purchase electricity, levy and metering costs and —— the average outcome based on the modelled impact of 79 the cost to serve customers) and lines component (charges for historical years of national hydrological or climatic conditions; transmission and distribution). —— national demand remains largely flat in FY2014 and FY2015, including assumptions that: The customer electricity sales prices are subject to the following • the level of demand from New Zealand Aluminium Smelters underlying assumptions: Limited at the Tiwai Point aluminium smelter does not change —— changes in the lines component that Genesis Energy incurs will from average levels in FY2013; and be largely passed on to customers; • no material technological advances in the more efficient use —— the energy and service costs component of the electricity retail and generation of electricity; price increases on average approximately 2.2% in each year; —— gas and coal fuel costs and availability based on specific fuel —— retail price changes are to take effect from early April in each assumptions (see assumptions 13, 14, 15 and 16); and year for the largest 15 regions in New Zealand by retail customer —— no material infrastructure change or operating limitations other revenue (these regions represent approximately 90% of Genesis than known power station availability including: Energy’s total retail customer revenue). The remaining retail • known new generation build and decommissioning announced price changes to take effect on a staggered basis through April to the New Zealand electricity market, including that Contact and May each year, to move Genesis Energy towards the industry Energy’s TCC power station will not operate during winter 2014; average in terms of the period over which price increases are implemented; • known New Zealand electricity generator planned outages; and —— aggregate retail price increase (including both the lines and the • known transmission constraints for the high voltage direct energy and service costs components) equates to approximately current link. 3.6% for April 2014 for the largest 15 regions;
44 Customer numbers based on Customer Connections and excludes vacants and TOU 45 Customer numbers are per product. Note that some customers purchase more than customers, and is sourced from Genesis Energy records. This data may differ from one product and therefore could fit into more than one category. Customer Connections data sourced from the Electricity Authority that appears 46 Based on Electricity Authority switching history reports. elsewhere in this Investment Statement due to differences in the way Customer Connections are measured.
Genesis Energy Share Offer investment statement 53 APPENDIX
The above modelling affects the following line items in the assumption 12); and consolidated prospective comprehensive income statement: —— ‘Fuels consumed’ (see assumption 15). —— ‘Electricity revenue’;47 The modelling also forecasts generation volumes (see assumption 10). —— ‘Electricity purchases, transmission and distribution’ (including electricity purchases, Derivatives and spot costs – see Refer to Sensitivity Analysis later in this Appendix for sensitivity analysis on wholesale electricity prices and generation volumes.
Wholesale Electricity Prices
FY2012 FY2013 FY2014 FY2015 ($/MWh) Historical Historical Prospective Prospective
Time weighted48 average annual wholesale electricity price 85.77 73.40 58.20 to 68.20 65.50 to 75.50
10. Generation volumes and output canal and power stations in FY2013) the generation output of the Based on Genesis Energy’s demand and supply simulation model, Tekapo Power Scheme was approximately 200 GWh; generation volumes have been forecast for FY2014 at 6,667 —— a second of the four 250 MW coal/gas fired Rankine Units at the GWh and for FY2015 at 6,959 GWh. These are both below recent Huntly Power Station was placed into long-term storage in late historical generation volumes of 7,212 GWh and 8,467 GWh in December 2013 and the decommissioning process for the first FY2013 and FY2012 respectively, primarily due to the reduced unit in storage commenced. Therefore in the Prospective Period wholesale electricity prices. Genesis Energy will have one of the Rankine Units in storage and one decommissioned, and two units available to the market; Hydro generation is forecast to increase in FY2014 due to the —— FY2014 includes an outage for Unit 6 at Huntly Power Station for increased hydro inflows and levels of storage experienced in the the first nine months; and first half of the year in particular, returning to more normal levels by —— there will be no material power station failures or interruptions the end of the year. A further increase in hydro generation in FY2015 to Genesis Energy’s activities during the Prospective Period, reflects a full year of generation from the Tekapo Power Scheme. including as a consequence of technical issues, operational error, Underlying assumptions are: catastrophic events or normal hazards associated with operating —— an outage for 50 days in Q3 FY2014 for the Tekapo canal the Company’s business. remediation process (with specified dates for return to service See Sensitivity Analysis later in this Appendix for sensitivity analysis of Tekapo generators in March and May 2014). In the equivalent on generation volumes. period in FY2012 (noting there was also an outage at the Tekapo
Summary of Generation Volumes
FY2012 FY2013 FY2014 FY2015 Historical Historical Prospective Prospective
GWh % of total GWh % of total GWh % of total GWh % of total
Gas 3,041 36% 2,732 38% 2,780 41% 3,008 43%
Coal 2,613 31% 2,259 31% 1,317 19% 1,106 16%
Thermal 5,654 67% 4,991 69% 4,097 61% 4,114 59%
Hydro 2,788 33% 2,200 31% 2,543 38% 2,815 40%
Wind 25 0% 21 0% 27 0% 30 0%
Renewable 2,813 33% 2,221 31% 2,570 39% 2,845 41%
Total 8,467 7,212 6,667 6,959
Generation volumes are sold or traded on the national wholesale temperatures in H1 2014) and therefore the generation of electricity, electricity market at the time of generation which contributes to which in turn can have a positive or negative impact on financial Electricity revenue. Total generation volumes in FY2014 and FY2015 performance. Demand is typically lower in warm months and can are forecast to be significantly below installed generation capacity. increase by more than 30% during winter. 11. Seasonality A significant amount of Genesis Energy’s FY2014 EBITDAF is forecast Fluctuations in seasonal weather patterns have a significant in the winter months of May and June. This is due to the seasonal impact on supply and demand (for example the above average uplift in customer demand and the historical pattern of more Thermal Generation in periods of higher wholesale electricity prices. 47 Including contracted, spot and Derivative wholesale electricity sales revenue from sales to other generator/retailers, retail customers and to the New Zealand Futures Seasonality for FY2014 (last six months only) and FY2015 has been and Options market. forecast consistent with previous periods. 48 A simple average of all prices published in the market at half hour intervals for a specific time period (at the Huntly Node).
54 APPENDIX PROSPECTIVE FINANCIAL INFORMATION 12. Electricity purchases, transmission and distribution 15. Fuels consumed operating expenses Fuels consumed is based on Genesis Energy’s demand and supply Electricity purchase costs relate to costs of buying electricity for our simulation model for estimating the wholesale electricity path (see customers (retail, TOU, spot and Derivatives) at the price the market assumption 10 “Generation volumes and output”). charges at the time of the purchase. The volume of generation is the key driver in changes in fuels The lines/distribution companies’ current published pricing applies for consumed expenses, as forecast average cost of fuel per unit the period to 31 March 2014 and pricing provided to Genesis Energy consumed is in-line with FY2013 (after reflecting purchase by the lines/distribution companies applies from 1 April 2014. Producers Price Index increases) based on agreed supply contracts.
There is no material change to the current transmission pricing All suppliers will deliver to the coal and gas supply arrangements methodology and distribution network charges. Increases in the agreed to between the parties. lines component that Genesis Energy incurs will be largely passed Obligations under a contract for the supply of imported coal have on to customers (see “prices” in assumption 8 “Customer electricity been terminated which has also triggered various contracts related and gas revenue”). to the transport, handling and storage of the imported coal to be 13. Gas revenue, purchases and transmission provided for as onerous with a total adverse impact to EBITDAF of All contracted gas supplies are either consumed as fuel for $19.1 million in H1 2014. The total cost is expected to reduce in the generation of electricity or on sold to retail customers or second half of FY2014 as sub-lease contracts are completed. The wholesale (being commercial and industrial or large industrial benefit of this contract termination is reduced operating expenses and petrochemical customers). for coal handling, transportation and storage with effect from 1 January 2014 benefiting Genesis Energy by approximately Wholesale Gas Revenue arises from: $3.5 million per annum along with cash savings from reduced —— sales of committed gas volumes at contracted gas sales prices; coal commitments. and —— sales of uncommitted gas volumes which will be contracted at 16. Coal stockpile current market prices. With the above noted coal supply arrangements, the coal stockpile is forecast to remain fairly steady being 877 kT ($93.4 million) Any unsold gas volumes will be consumed in Thermal Generation. as at 30 June 2013, 910 kT ($96.1 million) as at 30 June 2014, and Gas supply contracts peak in volumes in FY2014 reducing in FY2015. 883 kT ($94.4 million) as at 30 June 2015, all based on the weighted Gas purchase prices have been negotiated over the course of the average cost base at respective year ends. historical financial period in relation to take or pay contracts the 17. Other revenue Company has with third parties and the gas it purchases from the Other revenue in the Prospective Period is forecast in line with other Kupe Joint Venture parties. FY2013, adjusted for: There will be no material gas supply disruption nor change to the —— an insurance compensation benefit received in FY2013 of $18.6 current gas transmission pricing methodology and gas distribution million (Genesis Energy’s share of insurance proceeds for network charges. recovered costs incurred in relation to the Kupe subsea utilities umbilical cable); 14. Petroleum revenue, production, marketing and distribution —— no forecast coal sales (which reduces other operating revenue); and costs and crude oil price assumptions —— known lease expiries reducing lease income. Assumptions relating to Kupe production volumes are based on the fixed long-term natural gas contracts (mostly on a take or pay 18. Emission Units on hand and carbon charges basis) with the Kupe Joint Venture partners updated for the latest The Emissions Trading Scheme (“ETS”) affects Genesis Energy as a contracted production volumes, prices and natural gas to oil and large user of coal and gas. Genesis Energy purchases Emission Units LPG ratios. The total field production volumes forecast for natural (units issued under the ETS) from within New Zealand or from the gas are 22.3 PJ for FY2014 and 21.1 PJ for FY2015. Genesis Energy’s global market. Prices of Emission Units will increase in line with the share of the corresponding production volumes forecast for oil are estimated market wholesale electricity prices. 515.1 kbbl and 434.8 kbbl, and for LPG are 29.6 kT and 27.8 kT in FY2014 and FY2015 respectively. FY2012 FY2013 FY2014 FY2015 $million Historical Historical Prospective Prospective Assumptions relating to marketing and distribution costs are based Emission Unit 18.5 22.2 – – on the fixed long-term contracts agreed with the joint venture net additions partners and recent actual costs.
The underlying assumptions for oil price (all in United States There will be no material changes to the ETS, emission obligations Dollars) are: or global Emission Unit prices. —— hedged oil price will be $102.60/bbl in FY2014 and $99.60/bbl Costs in the prospective financial information, as per the historical in FY2015; financial information, reflects net obligations after taking into —— 68% will be hedged (including actuals to December 2013) for consideration forward purchased Emission Unit contracts. Genesis FY2014 at an average price of $102.90 and 56% will be hedged Energy has entered into forward purchase contracts to acquire for FY2015 at an average price of $99.50; and significant Emission Units to offset its FY2014 and FY2015 obligations. —— Spot oil price will be $103.30/bbl for the second half of FY2014 and $99.60/bbl in FY2015. The hedged position is 100% of forecast obligations for both FY2014 and FY2015.
Genesis Energy Share Offer investment statement 55 APPENDIX
19. Employee benefits compared to FY2013; however they decrease by $2.7 million after Employee benefits are based on benefits in the most recent actual excluding one-off items. One-off items include costs related to this period adjusted for estimated headcount and known salary and Offer of $10.0 million and a termination fee and related provision for other remuneration changes. onerous contracts of approximately $16.2 million (net of estimated sub-lease revenue) associated with the Company’s contracts for FY2014 increases on FY2013 by 4.1% with average employee procurement of imported coal (see assumption 15 “Fuels consumed”). benefits increasing by approximately 3.4% p.a. and a net cost of redundancy payments. FY2015 reduces from FY2014 by 2.0% due to Other operating expenses decrease by $29.5 million in FY2015, the benefit from a reduction in headcount outweighing the average compared to FY2014 with no one-off items and a full year of employee benefits increase of 3.0%. benefits to operating costs from savings from the exit of coal import contracts in late 2013. Other operating costs decrease as cost Administrative and set up costs will be incurred in FY2014 and savings outweigh inflation increases. FY2015 for the Executive LTI Plan and the proposed Employee Share Ownership Plan as discussed in Section 4.2 Board, Management 21. Depreciation, depletion and amortisation and Corporate Governance of the Prospectus. Genesis Energy will Historical rates of depreciation will apply to the asset base adjusted provide an interest free loan to a related party trust to acquire for forecast capital expenditure. shares for the Executive LTI Plan, and the proposed Employee Share Oil and Gas depreciation and depletion has increased in FY2014 Ownership Plan is envisaged to include share grants. There are also due to the higher charge in the first 6 months of the year and potential release costs. None of these items affect the Group PFI higher production volumes (see assumption 14 “Petroleum revenue, (except the administrative and set up costs) as any Shares offered production, marketing and distribution costs and crude oil price under these plans are assumed to be offered at their market price. assumptions”). Whilst depletion is based on depleting the cost of 20. Other operating expenses oil and gas assets recognised, the percentage reduction in reserves Other operating expenses include meter reading and maintenance is used to determine depletion rates. See Section 4.5 Independent costs, contractors and material costs, consultants and professional Expert’s Summary Report on Kupe Reserves and Resources of the service costs, advertising, marketing and promotion costs, property Prospectus for the independent expert’s summary of its assessment costs, bad and doubtful debts, plant, equipment and vehicle running of Kupe reserves. costs and other operating costs. The finance lease receivable expired in FY2013. Other operating expenses increase by $23.5 million in FY2014,
Depreciation, Depletion and Amortisation Summary
FY2012 FY2013 FY2014 FY2015 $million Historical Historical Prospective Prospective
Depreciation of property, plant and equipment 80.4 80.6 91.2 94.1
Depreciation and depletion of oil and gas assets 56.3 40.4 54.8 47.3
Amortisation of intangibles 12.5 12.8 11.8 8.8
Amortisation of finance lease receivable 2.9 1.3 - -
Total depreciation, depletion and amortisation 152.1 135.0 157.8 150.2
22. Impairment 24. Derivatives and Change in Fair Value of Financial The impairment charge totals $9.5 million in FY2014 and Instruments $13.5 million in FY2015. Non-current assets will incur impairment These assumptions affect contract revenue within Electricity equivalent to forecast capital expenditure on the Rankine Units revenue and change in fair value of financial instruments, both and Unit 6 as these assets’ fair value is forecast to remain at $nil. within the prospective comprehensive income statement along Excepting the above items, no further asset impairments have with Derivatives held in the balance sheet. been forecast in FY2014 and FY2015. Changes in fair value of financial instruments have been modelled. 23. Revaluation There are a series of underlying assumptions in the modelling Generation assets carried at fair value were last revalued as at regarding financial instruments held, hedging effectiveness, forward 30 June 2013. No change in fair value of generation assets in the curves, and realisation. The key specific underlying assumptions for Prospective Period is expected. material financial instruments are:
56 APPENDIX PROSPECTIVE FINANCIAL INFORMATION —— interest rate swaps and foreign exchange forward rate contracts 26. Income tax expense are valued against forward curves; The income tax rate will be 28% on taxable profit based on the —— all interest rate swaps, oil options, oil swaps and foreign exchange current corporate tax rate in New Zealand. forward rate contracts are held to maturity and there are no new Deferred Tax Liability will remain in line with the liability at 30 June interest rate swaps and foreign exchange forward rate contracts; 2013 and the treatment of powerhouse assets and Tekapo canal —— electricity contracts for differences assumptions are consistent remediation project costs is consistent with the financial statements with financial reporting standards with the valuation based as set out in Section 6.4.5 Audited Financial Statements for the Year on an effective/ineffective assessment. The key assumptions Ended 30 June 2013 (Note 16) of the Prospectus. in the model are: the volumes and the strike price outlined in the agreement with the counterparty, the forecasted internally There are no significant items being revisited by the IRD as a result generated electricity price path, emission credits and the of change in tax policy or retrospective regulation changes. discount rate. The lead-in and long-term hedges fall within Tax will be paid when it falls due subject to accruals. this category; —— all new electricity contracts for differences are at fair value at 27. Borrowings and cash inception and through the Prospective Period; Appropriate debt funding is in place (i.e. wholesale and retail bonds —— the valuation of electricity options is based on a discounted cash and Capital Bonds and bank funding facilities) and will remain in flow model over the life of the agreement. The key assumptions place for the Prospective Period. See Section 6.4.2 Discussion of in the model are: the callable volumes, strike price and option fees Historical Operational and Financial Information of the Prospectus outlined in the agreement with the counterparty, the forecasted for further discussion of Liquidity and Capital resources in FY2011 to internally generated electricity price path, day one gains and FY2013 including debt funding available as at 31 December 2013 and losses, emission credits and the discount rate. The options are Genesis Energy’s debt maturity profile as at 31 December 2013. deemed to be called when the internally generated price path is From a cash flow perspective, proceeds from borrowings in FY2014 higher than the strike prices after taking into account obligations will be a $197.1 million drawdown on bank funding facilities and $nil relating to the specific terms of each contract; in FY2015. Repayment of borrowings in FY2014 includes $75 million —— the Meridian swaption49 is available to Meridian between April being the principal amount of Capital Bonds as part of the and October 2014 and the additional canal remediation swaption modification process50 and $120 million of retail bonds. In FY2015 is available when Tekapo canal remediation work is planned (that it is forecast that $68.1 million of borrowings will be repaid. is, between January 2014 and March 2014 in the Prospective Period), earning Genesis Energy a fixed premium fee for every Cash and cash equivalents will be consistent in the Prospective month the swaption is available; Period at $24.5 million which is in line with cash and cash —— Total FY2014 option fees (contract revenue) earned will be less equivalents at 30 June 2013 of $22.7 million. Therefore in FY2015 than in FY2013 and FY2015 approximates half the fees of FY2013 cash flows from operating activities, investing activities and due to the above noted swaptions; and financing activities net to $nil, with any balance of operating —— All other existing electricity Derivatives are held to maturity. activities in excess of investing activities applied against borrowings. 25. Net finance expense 28. Non-current assets Finance (Interest) expense will be at an average rate of 6.4% Non-current assets will reduce as total depreciation, depletion and applicable for FY2014 and 6.6% for FY2015 on borrowings. amortisation (see assumption 21) exceeds total capital expenditure This reflects the average of interest rates for the different debt (see assumption 29) and no revaluations are forecast. instruments that the Company utilises including retail bonds, Capital There will be no changes to existing resource consents and/or their Bonds, bank debt and wholesale debt. Interest will be paid when conditions which relate to the generation assets. it falls due subject to accruals. There will be no catastrophic events (refer to Section 6 What are There will be no change in credit rating in the Prospective Period. my Risks?) that affect Genesis Energy’s assets or operations or the national electricity and gas market.
29. Capital expenditure
FY2012 FY2013 FY2014 FY2015 $million Historical Historical Prospective Prospective
Tekapo canal remediation project 7.8 104.8 32.4 -
Oil and gas rehabilitation 20.1 2.6 - -
Stay-in business capital expenditure 51.7 59.8 60.1 61.2
Total Capital Expenditure 79.6 167.2 92.5 61.2
Total capital expenditure relates to additions spread across property, plant and equipment, oil and gas assets and intangible
49 See Section 4.1 Business Description of the Prospectus for further information about assets (excluding emission units see assumption 18). the Meridian swaption. Ordinary asset replacement and maintenance, in the normal course 50 Refer Section 6.4.5 Audited Financial Statements for the Year Ended 30 June 2013 (Note 30) of the Prospectus for further details on the modification process. of business, is forecast in respect of the existing asset base at an
Genesis Energy Share Offer investment statement 57 APPENDIX
annual capital cost of circa $60 million. This is also referred to as hedged at an average rate of ¥62; “stay-in business capital expenditure”, which relates to on-going —— For FY2015 Japanese Yen maintenance costs are assumed to be asset management and lifecycle maintenance and re-investment ¥578 million of which 90% has been hedged at an average rate programme expenditure and includes capital expenditure on of ¥74; and maintaining options for future development but excludes oil and —— The average assumed exchange rates for unhedged transactions gas rehabilitation and the Tekapo canal remediation project capital are USD0.79 in the second half of FY2014 and USD0.77 in FY2015 expenditure. and ¥80.7 in the second half of FY2014 and ¥78.5 in FY2015. In addition, specific capital expenditure on the Tekapo canal 32. Business acquisitions and disposals remediation project of $32.4 million is forecast in FY2014. While The PFI does not include the acquisition or disposal of any Genesis Energy continues to develop its portfolio of new electricity significant assets in the Prospective Period. generation options no development or growth capital expenditure is 33. Litigation forecast in the Prospective Period. As at the date of this Investment Statement, no litigation during The Tekapo canal remediation project is consistent with the capital the Prospective Period which would adversely affect the financial expenditure previously announced and relates to the second performance of Genesis Energy or its financial condition during the stage of a two stage project which commenced in January 2014. Prospective Period is known to exist. The first of the two stages was successfully completed in January 34. Related party transactions through March 2013 with a capital expenditure of $105 million (with Except as disclosed in Section 7.0 Terms of the Offer of the $8 million incurred in FY2012). The total project was budgeted Prospectus and in respect of interest free loans for the purposes to include spend of $145 million to $155 million. Based on latest of the Executive LTI Plan (see Section 4.2 Board, Management and information the Company assumes total capital expenditure for this Corporate Governance of the Prospectus), all transactions with project to be at the lower end of this range at $145 million. the Crown, Crown owned entities and state-owned enterprises, Investing cash flows for the purchase of property, plant and subsidiaries and associates, joint operations and key management equipment, oil and gas assets and intangible assets will be broadly personnel will continue to be conducted on an arm’s length basis in line with the capital expenditure forecast, differing for capital and at normal market prices and on commercial terms. expenditure accruals. 35. Equity 30. Working capital items There will be no new equity issued post the Allotment Date with Trade Receivables and accrued income assumes normal receipt 1 billion ordinary shares on issue and fully paid on the Allotment terms. Payables and accruals will be on standard payment terms Date (540,565,002 as at 30 June 2013). In March 2014 the Company (that is, one month in arrears) for operating expenses. made a bonus issue of 459,434,998 ordinary shares to existing Shareholders. Inventories (current and non-current) relate to fuel and petroleum products, consumables and spare parts. Fuel and petroleum 36. Dividends products vary with Thermal Generation and timing of production Dividends will be declared and paid based on the current dividend at Kupe. Other inventories will be consistent with the balance at policy. 30 June 2013. Total dividends paid to the Crown in FY2014 of $121.0 million, Provisions will be materially unchanged on 31 December 2013 includes the final dividend for FY2013 of $57.0 million, paid in balances. No wholesale electricity market counterparties are October 2013, and $64.0 million to be paid in April 2014. Total forecast to materially default on market payments. dividends paid to Shareholders in FY2015 are forecast to be $144.0 million, which includes the final FY2014 dividend of $64.0 million to Receipts and payments are assumed to follow the seasonal be paid in October 2014 and the interim FY2015 dividend of $80.0 pattern of FY2013 (see assumption 11 “Seasonality”) and most other million to be paid in April 2015. payments and receipts being paid or collected either as incurred or recognised, or in the month following. Total dividends declared for FY2015 are forecast to be $160.0 million (16.0c per Share) comprising a 50% interim dividend payable in Finance lease liabilities relate to the normal course of business and April 2015 and a 50% final dividend to be paid in October 2015. reduce due to the exit from import coal contracts (see assumption Total dividends declared for FY2014 are forecast to be $128.0 million 20 “Other operating expenses”). (12.8c per Share). 31. Foreign currency The dividends declared approximate 84% in FY2014 and 83% in Genesis Energy operates predominately in New Zealand dollars but FY2015 of Free Cash Flow. Free Cash Flow is a non-GAAP measure. has exposure to United States dollar foreign exchange through sales Refer to “Explanation of Non-GAAP Financial Information” in of oil and gas and Japanese Yen for maintenance costs. Section 5 Overview of Financial Information for further details, For the PFI, the underlying assumptions are: and the calculation of Free Cash Flow and dividends declared as —— For the second half of FY2014 total sales denominated in USD a percentage of Free Cash Flow. are assumed to be $48 million of which 56% has been hedged at Dividends in the Prospective Period are expected to be fully an average rate of USD0.78; imputed. At a tax rate of 28% (see assumption 26 “Income tax —— For FY2015 total sales denominated in USD are assumed to be expense”) the dividends declared grossed up for imputation credits $83 million of which 30% has been hedged at an average rate of are forecast to be $177.8 million (17.8c per Share) for FY2014 and USD0.78; $222.2 million (22.2c per Share) for FY2015. —— For the second half of FY2014 total Japanese Yen maintenance costs are assumed to be ¥284 million of which 98% has been
58 APPENDIX PROSPECTIVE FINANCIAL INFORMATION Consolidated Prospective Financial Information Genesis Energy Limited and Subsidiaries Consolidated Prospective Comprehensive Income Statement For Year Ending For Year Ending 30 June 2014 30 June 2015 $million Assumptions Prospective Prospective Operating revenue Electricity revenue 3, 8, 9, 10, 11, 18, 24 1,691.3 1,844.1 Gas revenue 3, 8, 11, 13 261.0 244.0 Petroleum revenue 3, 14 81.3 68.3 Other revenue 17 7.0 9.4 2,040.6 2,165.9
Operating expenses Electricity purchases, transmission and distribution 3, 8, 9, 11, 12, 18, 24 (912.8) (1,025.3) Gas purchases and transmission 3, 13 (257.2) (235.4) Petroleum production, marketing and distribution 3, 14 (30.1) (28.5) Fuels consumed 10, 15, 16 (203.1) (212.4) Employee benefits 19 (87.0) (85.2) Other operating expenses 20 (245.2) (215.6) (1,735.4) (1,802.4)
Earnings before net finance expense, income tax, impairment, depreciation, 305.2 363.4 depletion, amortisation, fair value changes and other gains and losses
Depreciation, depletion and amortisation 21 (157.8) (150.2) Impairment of non-current assets 22 (9.5) (13.5) Change in fair value of financial instruments 24, 31 (3.9) 4.1 Other (losses) gains (0.3) -
Profit before net finance expense and income tax 133.7 203.8
Finance revenue 0.4 - Finance expense 25 (71.5) (70.5)
Profit before income tax 62.6 133.3
Income tax expense 5, 26 (20.8) (37.9)
Net profit for the year 41.8 95.4
Other comprehensive income
Items that may be reclassified subsequently to profit or loss: Change in cash flow hedge reserve 24 1.0 2.6 Income tax (expense) relating to items that may be reclassified 26 (0.3) (0.7) Total items that may be reclassified subsequently to profit or loss 0.7 1.9
Total other comprehensive income for the year 0.7 1.9
Total comprehensive income for the year 42.5 97.3
Earnings per Share attributable to equity holders: Basic and diluted earnings per Share (cents) 35 4.2 9.5
Genesis Energy Share Offer investment statement 59 APPENDIX
Genesis Energy Limited and Subsidiaries Consolidated Prospective Statement of Changes in Equity
For Year Ending 30 June 2014 Asset revaluation Cash flow Retained $million Share capital reserve hedge reserve earnings Total
Assumptions 35 23, 28, 32 24 36
Balance at 1 July 2013 540.6 806.4 (8.7) 611.5 1,949.7
Net Profit for the year – – – 41.8 41.8
Other comprehensive income Change in cash flow hedge reserve – – 1.0 – 1.0
Income tax credit (expense) relating to other comprehensive – – (0.3) – (0.3) income
Total comprehensive income for the year – – 0.7 41.8 42.5
Revaluation reserve reclassified to retained earnings on – (0.6) – 0.6 – disposal of assets
Dividends paid – – – (121.0) (121.0)
Balance at 30 June 2014 540.6 805.8 (8.0) 532.8 1,871.2
For Year Ending 30 June 2015 Asset revaluation Cash flow hedge Retained $million Share capital reserve reserve earnings Total
Assumptions 35 23, 28, 32 24 36
Balance at 1 July 2014 540.6 805.8 (8.0) 532.8 1,871.2
Net Profit for the year – – – 95.4 95.4
Other comprehensive income Change in cash flow hedge reserve – – 2.6 – 2.6
Income tax credit (expense) relating to other comprehensive – – (0.7) – (0.7) income
Total comprehensive income for the year – – 1.9 95.4 97.3
Dividends paid – – – (144.0) (144.0)
Balance at 30 June 2015 540.6 805.8 (6.1) 484.2 1,824.5
60 APPENDIX PROSPECTIVE FINANCIAL INFORMATION Genesis Energy Limited and Subsidiaries Consolidated Prospective Balance sheet As at As at 30 June 2014 30 June 2015 $million Assumptions Prospective Prospective
Current assets Cash and cash equivalents 27 24.5 24.5
Receivables and prepayments 30 281.1 259.2
Inventories 16, 30 69.9 63.5
Emission Units on hand 18 2.3 2.3
Derivatives 24 13.3 4.0
Total current assets 391.1 353.6
Non-current assets Property, plant and equipment 21, 23, 28, 29 2,782.0 2,733.8
Oil and gas assets 21, 28, 29 341.1 295.4
Intangible assets 21, 28, 29 118.2 109.6
Inventories 16 48.2 52.3
Receivables and prepayments 30 1.0 1.0
Derivatives 24 3.4 1.5
Total non-current assets 3,294.0 3,193.7
Total assets 3,685.1 3,547.2
Current liabilities Payables and accruals 30 235.4 228.5
Tax payable 26 1.6 8.0
Borrowings 27 11.3 114.7
Provisions 30 11.8 11.6
Derivatives 24 21.9 4.6
Total current liabilities 282.0 367.4
Non-current liabilities Payables and accruals 30 0.6 0.6
Borrowings 27 1,007.5 834.2
Provisions 30 130.2 129.0
Deferred tax liability 26 380.9 381.5
Derivatives 24 12.7 10.0
Total non-current liabilities 1,531.9 1,355.4
Total liabilities 1,813.9 1,722.8
Shareholder’s equity Share capital 35 540.6 540.6
Reserves 23, 24, 32, 36 1,330.6 1,283.9
Total equity 1,871.2 1,824.5
Total equity and liabilities 3,685.1 3,547.2
Genesis Energy Share Offer investment statement 61 APPENDIX
Genesis Energy Limited and Subsidiaries Consolidated Prospective Cash Flow Statement For Year Ending For Year Ending 30 June 2014 30 June 2015 $million Assumptions Prospective Prospective
Cash inflows from operating activities Cash was provided from:
Receipts from customers 3, 8, 9, 10, 11, 2,020.7 2,188.3 13, 14, 17, 18, 24, 30
Interest received 0.4 –
2,021.1 2,188.3
Cash was applied to:
Payments to suppliers and related parties 3, 8, 9, 11, 12, 14, 1,625.1 1,726.6 15, 16, 18, 20, 24, 30
Payments to employees 19, 30 87.2 85.2
Tax paid 5, 26 15.5 31.6
1,727.8 1,843.4
Net cash inflows from operating activities 293.3 344.9
Cash flows from investing activities Cash was provided from:
Proceeds from disposal of property, plant and equipment 0.1 –
0.1 –
Cash was applied to:
Purchase of property, plant and equipment 29 85.1 61.1
Purchase of oil and gas assets 29 4.0 1.6
Purchase of intangible assets 29 8.5 1.4
97.6 64.1
Net cash (outflows) from investing activities (97.6) (64.1)
Cash flows from financing activities Cash was provided from:
Proceeds from borrowings 27 197.1 –
197.1 –
Cash was applied to:
Repayment of borrowings 27 195.0 68.1
Interest paid and other finance charges 25 71.1 67.1
Repayment of principal on finance lease liabilities 30 4.0 1.6
Dividend paid 36 121.0 144.0
391.1 280.8
Net cash (outflows) from financing activities (193.9) (280.8)
Net increase (decrease) in cash & cash equivalents 27 1.8 – Opening cash and cash equivalents 27 22.7 24.5
Closing cash and cash equivalents 24.5 24.5
Cash on hand and at bank 27 24.5 24.5
Short term deposits – –
Closing cash and cash equivalents 24.5 24.5
62 APPENDIX PROSPECTIVE FINANCIAL INFORMATION Sensitivity Analysis Assumption 9 Wholesale electricity prices —— Wholesale electricity prices are dependent on a wide range Introduction to sensitivities of factors, not least including hydrological inflows, and are PFI is inherently subject to uncertainty and accordingly actual results inherently volatile (as discussed in Section 5.0 What are my are likely to vary from PFI and this variation could be material. You Risks? of the Prospectus). A change in wholesale electricity can find a full description of assumptions relating to the prospective prices will affect electricity revenue and purchases and financial information for FY2014 and FY2015 above, along with a settlements of financial instruments. The sensitivity applied to description of risks in Section 6 What are my Risks? of this Investment forecast wholesale electricity prices is to increase or decrease Statement and Section 5.0 What are my Risks? of the Prospectus. the time weighted annual average price within a relatively wide The sensitivity analysis below is provided to assist you with assessing range of annual average wholesale prices of $40/MWh to $90/ the potential effects of variations in certain key assumptions (defined MWh to illustrate the potential EBITDAF and Net Profit impact. as those most likely to materially affect results). For the purpose of the sensitivity analysis the sensitivity on The sensitivity for each assumption is not intended to be indicative wholesale electricity price change is applied to generation or predictive of the possible range of outcomes. Each movement volumes and retail purchases. Note that hydrological inflows in an assumption is calculated and presented in isolation from affect generation volumes as well as wholesale electricity prices. possible movements in other assumptions (i.e. when the assumption No change to generation volumes has been modelled for the is sensitised, all other things remain equal). In reality, it is more purposes of the sensitivity presented. See Section 4.1 Business likely that more than one assumption may move giving rise to Description of the Prospectus for further discussion of the impact compounding or offsetting effects. Furthermore the sensitivity of hydrological inflows on Genesis Energy’s performance. modelled does not take into account that management action will be taken which may potentially mitigate effects. Therefore care Assumption 10 Generation volumes should be taken in interpreting the sensitivity analysis. —— Generation volumes forecast for the Prospective Period are based on recent historical actual volumes aligned with the Sensitivities have been modelled to show the effect on forecast reduced wholesale electricity prices. Genesis Energy has the EBITDAF and Net Profit for the following key specific assumptions: ability to use, or not use, Huntly’s coal or natural gas fired generation in periods of higher, or lower, wholesale electricity Assumption 8 Customer electricity sales volumes prices. The plus or minus 10% sensitivity range provides an and prices illustration of the impact of higher, or lower, generation volumes, —— Retail customer electricity sales volumes are forecast to increase on EBITDAF and Net Profit assuming all other things remain in FY2014, by approximately 2.7% on FY2013, and a further 3.6% in equal, in particular no change in the price for generation or coal FY2015. This growth is a combination of increased TOU and retail burn, or the mix, as the volumes vary. This range is reflective of volumes. These increases are dependent on competitive behaviour the range in the historical period excluding FY2012 which was and economic activity. A sensitivity of an increase or a decrease in a dry weather year where production was 20% to 25% above retail customer FPVV electricity sales volumes of 5% for each year forecast production volumes. has been analysed. —— The energy and service cost component of retail customer prices In addition to the key sensitivities chosen, further sensitivities is affected by market conditions and competitive behaviour which show the impact of Wholesale Electricity Price on electricity amongst other things. The sensitivity range provided for the PFI Derivatives, reduced natural gas production volumes at Kupe and period is based on no increase through to a 5% increase, based movements in the USD:NZD exchange rate, oil prices and market on indicative historical price rises and assumes no changes in forecasts for interest rates are set out below. retail electricity volumes as prices vary.
Genesis Energy Share Offer investment statement 63 APPENDIX
FY2014 Forecast Sensitivities:
Impact on Impact on Key Assumptions PFI Sensitivity range EBITDAF Net Profit
Retail customer FPVV electricity sales volumes51 4,754 GWh Plus/minus 5% $4m to $(4)m $3m to $(3)m
Average increase in electricity retail price (energy and Increase by an average No increase/increase $(4)m to $5m $(3)m to $4m service costs component only) from April 2014 of 2.2% by 5%
Changes in time weighted average annual $58.2/MWh to $68.2/MWh $40/MWh to $90/MWh $(23)m to $8m $(17)m to $6m wholesale electricity prices51
Generation volumes at average weighted price51 6,667 GWh Plus/minus 10% $42m to $(42)m $30m to $(30)m
Forward electricity price curve for Derivatives51 $58.2/MWh to $68.2/MWh $40/MWh to $90/MWh N/A $13m to $(4)m
Foreign exchange movements impact on USD0.79 USD0.75 to USD0.83 $2m to $(2)m $1m to $(1)m unhedged oil and gas sales in USD51
Forward interest rates51 6.4% +/- 100 bps N/A $(1)m to $1m
Oil prices51 103.3 Plus/minus USD5/bbl $1m to $(1)m $1m to $(1)m
FY2015 Forecast Sensitivities:
Impact on Impact on Key Assumptions PFI Sensitivity range EBITDAF Net Profit
Retail customer FPVV electricity sales volumes 4,873 GWh Plus/minus 5% $11m to $(11)m $8m to $(8)m
Average increase in electricity retail price (energy Increase by an average No increase/increase $(20)m to $25m $(15)m to $18m and service costs component only) from April52 of 2.2% by 5%
Changes in time weighted average annual $65.5/MWh to $75.5/MWh $40/MWh to $90/MWh $(26)m to $17m $(19)m to $12m wholesale electricity prices
Generation volumes at average weighted price 6,959 GWh Plus/minus 10% $49m to $(49)m $35m to $(35)m
Forward electricity price curve for Derivatives $65.5/MWh to $70.5/MWh $40/MWh to $90/MWh N/A $9m to $(5)m
Foreign exchange movements impact on USD0.77 USD0.73 to USD0.81 $5m to $(4)m $4m to $(3)m unhedged oil and gas sales in USD
Forward interest rates 6.6% +/- 100 bps N/A $(2)m to $2m
Oil prices 99.6 Plus/minus USD5/bbl $2m to $(2)m $1m to $(1)m
Further sensitivity information for the Prospective Period —— The fair value of property, plant and equipment assets carried —— If Kupe natural gas production volumes were disrupted, without at valuation is sensitive to changes in assumptions including alternate volumes or compensating price changes then the forecast wholesale electricity prices. A sensitivity analysis is impact on EBITDAF is estimated at $2.0 million/PJ. provided in the audited financial statements set out inSection —— A prolonged unplanned outage of one of the Company’s 6.4.4 Audited Interim Financial Statements for the Six Months generating stations could, without a management response Ended 31 December 2013 and Section 6.4.5 Audited Financial incorporating the remaining asset portfolio, negatively impact Statements for the Year Ended 30 June 2013 of the Prospectus. EBITDAF. As an example, it is estimated that an unplanned —— Cash flows from operating activities are affected by most outage of Huntly Unit 5 for one week would reduce EBITDAF EBITDAF movements except to the extent of changes in balances by $1 million. for receivables and payables, movements in provisions and —— There is sensitivity around identified, and unidentified, capital tax paid. expenditure projects with respect to timing and level of capital expenditure that will need to be incurred. The current estimate of $60 million underlying “stay in business capital expenditure” is based on the average underlying sustaining spend of recent periods. The actual capital expenditure has often varied from this average capital expenditure. The sensitivity range is estimated as $20 million p.a.
51 These sensitivities for FY2014 have been modelled on the basis of change in the 52 The sensitivity modelled represents the total impact of the range being applied to assumption affecting the last 6 months of FY2014 only (given FY2014 has been both the April 2014 and April 2015 assumed price rises. prepared using 6 months of actual results to 31 December 2013).
64 APPENDIX PROSPECTIVE FINANCIAL INFORMATION diRectoRy dIRECTORy
ThE COMPANy AUdITOR NEW ZEAlANd RETAIl Genesis Energy Limited Andrew Dick of Deloitte OffER MANAGERS The Genesis Energy Building (on behalf of the New Zealand ANZ Bank New Zealand Limited 660 Great South Road Controller and Auditor-General) Ground Floor, ANZ Centre Greenlane Deloitte Centre 23-29 Albert Street Auckland 1051 80 Queen Street Auckland 1010 Auckland 1010 ThE CROWN ASB Bank Limited C/- The Treasury INvESTIGATING ASB North Wharf 1 The Terrace ACCOUNTANT 12 Jellicoe Street Wellington 6011 Ernst & Young Transaction Auckland 1010 Advisory Services Limited REGISTRAR Ernst & Young Building Computershare Investor 2 Takutai Square Britomart Services Limited Auckland 1010 Level 2, 159 Hurstmere Road Takapuna JOINT lEAd MANAGERS Auckland 0622 First NZ Capital Securities Limited and Credit Suisse (Australia) Limited lEGAl AdvISERS First NZ Capital Securities Limited TO ThE COMPANy Level 39, ANZ Centre Russell McVeagh 23-29 Albert Street Level 30, Vero Centre Auckland 1010 48 Shortland Street Credit Suisse (Australia) Limited Auckland 1010 Level 31, Gateway Building King & Wood Mallesons 1 Macquarie Place Sydney NSW 2000 Level 61, Governor Phillip Tower 1 Farrer Place Australia Sydney NSW 2000 UBS New Zealand Limited Australia Level 17, PWC Tower lEGAl AdvISERS 188 Quay Street TO ThE CROWN Auckland 1010 Chapman Tripp Level 35, ANZ Centre 23-29 Albert Street Auckland 1010 ThE GENESIS ENERGy ShARE OffER inVestment statement dated 13 maRcH 2014
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